Calculate Turnover for F&O Trading

With the rising investor interest in the Indian financial market, the futures and options segment has emerged as a new avenue for market participants wanting higher returns. Even though there is considerable interest in the segment, most investors do not have sufficient knowledge regarding topics like F&O turnover calculation, taxation policies on returns from the derivatives, and other related processes.

In this article, we will discuss the meaning of F&O turnover, F&O turnover calculation, and why it is important to learn. Without further ado, let’s begin.

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Before getting to the calculation and the formulas, it is important to know what F&O turnover is. The first thing you should know is that trading in the F&O segment is categorised as ‘business’ when it comes to taxation. The profits derived from F&O trading are thus recorded as business income and will be subject to taxation laws accordingly.

F&O turnover is thus an important metric for understanding and calculating your returns. In simple terms, your total F&O trading income can be called the F&O turnover. It accounts for all your profits and losses. From the income you earn through trading, all your expenses are subtracted. These include broker commissions, bills, rent, etc. Thus, depending on your profit level, the F&O turnover calculation could yield a positive or a negative result.

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For F&O turnover calculation, you are required to account for the following:

• When measuring the turnover, account for the aggregate of profit (favourable) and loss (unfavourable) differences.
• Factor in the premium the trader has earned during the options sale.
• Another crucial part of the turnover is accounting for the differences that may arise when the trader enters reverse trades.

Simply put, the futures turnover will be the absolute profit obtained as a sum of profit and loss.

Futures turnover = Aggregate of profit and loss from transactions in the year or Absolute profit

When the premium earned on options sale is also accounted for and added to the absolute profit, the equation gives us the options turnover.

Options turnover = Premium + Absolute profit

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Significance of F&O turnover calculation

F&O turnover calculation is crucial for multiple reasons. Let us take a look at what makes this metric important:

• Complying with taxation
  In India, any income derived from F&O trading has been categorised by the tax authorities as business income. The F&O trading itself is considered equivalent to a business activity. This decision was taken in 2006. For taxation purposes, the F&O income that you earn is considered part of your business turnover and reported as such.
• Analysing performance
  As a trader, analysing your performance continuously is important to making steady profits and staying on top of market trends. Monitoring your F&O turnover calculation periodically will help you gain insights into your portfolio's performance and assess the overall level of profit or loss that is expected in a given time period.
• Managing risk
  F&O turnover calculation is a great method for tracking your exposure in the financial market and making decisions accordingly. A reliable F&O turnover calculation will help you manage your risk levels and form strategies accordingly.
• Tax audit
  While a tax audit is not required for all levels of F&O turnover, it may be required if your earnings exceed a certain limit. The audit itself would consist of a thorough enquiry into your trading activities and accounts.

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Key update

An important update to the F&O reporting and audit came in 2014 when the Institute of Chartered Accountants of India (ICAI) issued a new guidance note. While the tax audit conditions remain unchanged, the calculation of turnover has been clarified. The note states that traders engaged in options trading should include only the total of the favourable and unfavourable differences (profits and losses) and not the sale premiums for the purpose of measuring turnover in taxation and reporting.

In the latest edition in 2022, ICAI has simplified options turnover calculation. The sales premium is now calculated as part of the annual turnover. Thus, it is not accounted for separately. This means that while the options turnover will be your absolute profit, the profit itself will include the premium from options sales.

Understanding and accuracy in F&O turnover calculation is crucial for traders to comply with taxation laws, analyse their performance, and manage risk effectively. The updated guidance from ICAI has simplified the calculation process, ensuring traders include all necessary components, such as premiums from options sales, in their annual turnover. This clarity helps traders better manage their financial activities and meet regulatory requirements, ultimately leading to more informed and strategic trading decisions.