Trading in futures and options has become a popular activity among traders, owing to the availability of multiple online trading platforms. Futures and options (F&O) are two types of derivatives — special contracts whose value is derived from the price of an underlying security or asset, and are available for trading in the Indian stock market. Furthermore, the F&O segment, over any other market segment, accounts for the majority of the trading across the stock exchanges in the country.
What is F&O Turnover?
F&O turnover encompasses the total value of all trades executed in the Futures and Options (F&O) markets over a defined period, such as a trading day, month, or financial year. This metric combines the value of both buying and selling activities within these derivative instruments.
F&O turnover is a key indicator of trading activity and market liquidity. It reflects how actively traders are engaging with futures and options contracts, which are financial instruments used to hedge risks or speculate on price movements.
To calculate F&O turnover, one sums up the value of each trade. For futures contracts, this includes the total of all executed buy and sell transactions. For options, it includes both the premiums received from selling options and the costs incurred from buying them.
In essence, F&O turnover provides a snapshot of market dynamics and is crucial for assessing trading volume, liquidity, and market interest in derivative instruments.
Why Is It Important To Calculate F&O Turnover?
Calculating the turnover on futures and options trading is important for tax filing purposes, and F&O trading is often reported as a business while filing tax returns. But one has to first analyse the total income for the year, which can be a positive or negative value (profit or loss). Expenses directly related to F&O business are deducted from the income, such as broker’s commission, office rent, telephone and internet bills etc., along with the depreciation on assets used for the business. The amount left will be the turnover from the F&O trading.
How To Calculate F&O Turnover?
F&O turnover is calculated as the absolute value of the profit or loss on a trade. To calculate the futures and options turnover, one has to take care of the following:
Futures Turnover:
- Calculate the profit or loss on each futures contract.
- Sum up the absolute values of all profits and losses for the period.
Options Turnover:
- Calculate the profit or loss on each options contract.
- Add the premium received from selling options to the total absolute profit/loss.
Key Points to Remember
- Absolute values are used for both futures and options turnover.
- Option premiums received are included in options turnover.
- Complex strategies and multiple legs can increase calculation complexity.
- Brokerage statements often provide turnover details.
Key Elements of F&O Turnover
- Number of Contracts Executed
This represents the total count of futures or options contracts that were either purchased or sold within the trading period.
- Contract Size
Each futures or options contract comes with a specific value, often referred to as the “lot size” or “contract size.” For instance, a single Nifty futures contract might have a lot size of 75.
- Price of the Underlying Asset
The value of the underlying asset, whether it’s a stock, index, or commodity, plays a critical role in calculating the turnover.
Example To Calculate Turnover For F&O Trading
Assume a trader executed the following trades in a financial year:
Futures Trades
- Bought 100 Nifty futures contracts at 15,000, sold at 15,200.
- Bought 50 Bank Nifty futures contracts at 30,000, sold at 29,800.
- Sold 80 Nifty futures contracts at 15,300, bought back at 15,150.
Options Trades
- Sold 50 Nifty 15000 Call options at ₹100 premium.
- Bought 50 Nifty 15000 Call options at ₹50.
- Sold 30 Bank Nifty 31000 Put options at ₹80 premium.
Futures Turnover Calculation
- Trade 1: Profit = (15,200 – 15,000) * 100 * Lot Size = ₹2,00,000
- Trade 2: Loss = (30,000 – 29,800) * 50 * Lot Size = ₹1,00,000
- Trade 3: Profit = (15,300 – 15,150) * 80 * Lot Size = ₹1,20,000
Total Futures Turnover: ₹ (200,000 + 100,000 + 120,000) = ₹4,20,000
Options Turnover Calculation
- Trade 1: Premium Received = 50 * 100 * Lot Size = ₹50,000
- Trade 2: Loss = (100 – 50) * 50 * Lot Size = ₹25,000
- Trade 3: Premium Received = 30 * 80 * Lot Size = ₹24,000
Total Options Turnover: ₹ (25,000 + 50,000 + 24,000) = ₹99,000
Total F&O Turnover
Total F&O Turnover = Futures Turnover + Options Turnover
Total F&O Turnover = ₹ (4,20,000 + 99,000) = ₹5,19,000
Note: The actual turnover value will depend on the lot size of the respective contracts in this example; we have considered it to be 10. This example provides a basic understanding of how to calculate F&O turnover. In real-world scenarios, there might be numerous transactions, including multiple contracts, different expiry dates, and complex option strategies.
F&O Losses and Tax Audit
Regardless of the profits or losses, F&O turnover has to be reported. However, F&O losses come with tax benefits; Tax Audit u/s 44AB is applicable when the taxpayer either reports losses in the turnover, or if the trading turnover exceeds ₹1 crore, or ₹2 crores, if covered by the presumptive taxation scheme. The taxpayer can also decide not to claim, and carry forward the loss, in which case the tax audit can be avoided, and the loss can be set-off against future profits since F&O losses are non-speculative, to reduce income tax liability.
If the taxpayer decides to go with the tax audit, they must appoint a Chartered Accountant in order to:
- Prepare Financial Statements (Profit and loss – balance sheet)
- Prepare and file Tax Audit Report (Form 3CD)
- Prepare and file ITR
Conclusion
F&O trading has become an attractive proposition due to the availability of multiple trading platforms. Taxpayers often get confused while filing taxes about the income generated by F&O trading, and it is important to understand how to calculate F&O turnover for income tax purposes, and when tax audit is applicable.
