In recent years, there has been a notable jump in people investing in futures and options, as reflected by a surge in DEMAT accounts in India, from 34% to 10.8 CR in December on attractive returns.
The F&O segment of the derivatives market has gained immense popularity, allowing investors to seek substantial profits with minimal investment.
However, newcomers must understand how to calculate F&O turnover for tax obligations.
When investors have a grasp of this calculation, they can ensure compliance and effectively manage their tax responsibilities in the dynamic world of derivatives trading.
What is F&O Turnover?
Tax authorities consider futures and options, or F&O, trading as a category of business.
This results in F&O income being treated as business income. Hence, gains from the derivatives market are subject to business taxation.
Calculating F&O turnover is necessary to determine tax obligations accurately. F&O turnover encompasses total income from trading and incorporates profits and losses.
For an accurate estimation, subtract all expenses incurred during F&O trading, such as broker commissions, rents, and bills, from the income.
This calculation may yield either positive or negative F&O turnover based on the extent of profits and losses incurred.
How to Calculate F&O Turnover?
When calculating F&O turnover, it is essential to consider the following key points:
The difference between positives and negatives.
The difference in turnover between reverse trades.
The premium received from selling options as per the Income Tax Act, 1961.
In F&O trading, the futures turnover is calculated based on the absolute profit. It includes the combined positive and negative differences arising from various transactions throughout the year.
The calculation for futures turnover is as follows:
Futures Turnover = Absolute Profit.
On the other hand, options turnover is computed by adding the premium received from selling options to the absolute profit. Hence, the formula for options turnover is:
Options Turnover = Absolute Profit + Premium received on selling the options
What are F&O Losses and Tax Audit?
Reporting your F&O Turnover is mandatory, irrespective of profits or losses. However, F&O losses offer tax benefits.
A tax Audit under Section 44AB applies if the taxpayer's trading turnover is more than Rs. 1 crore (Rs. 2 crores under presumptive taxation) or they report losses in their turnover.
Conversely, the taxpayer can choose not to claim and carry forward the loss, avoiding a tax audit and offsetting it against future profits.
As F&O losses are non-speculative, they reduce income tax liability.
To undergo a tax audit, appointing a chartered accountant is necessary for preparing financial statements, filing a tax audit report (Form 3CD), and ITR.
When is F&O Trading Audited?
The audit's applicability varies based on turnover:
Turnover up to Rs. 2 crores: A tax audit applies if the profit or loss is less than 6% of the trading turnover. If it is equal to or greater than 6%, no tax audit is required.
Turnover from Rs. 2 crores to Rs. 10 crores: A tax audit applies if the profit or loss is less than 6% of the trading turnover. However, if the taxpayer has opted for presumptive taxation under Section 44AD and made a gain of 6% or more, no tax audit is necessary.
Turnover above Rs. 10 crores: A tax audit is mandatory regardless of profit or loss when the trading turnover exceeds Rs. 10 crores.
Failure to have accounts audited can result in a penalty of Rs. 1.5 lakhs or 0.5% of turnover, as determined by the IT department.
To summarize, an accurate calculation of futures and options turnover is vital for a precise tax assessment.
Errors in turnover calculation can lead to incorrect tax payments, risking penalties.
It is essential to understand the difference in the turnover calculation for each, ensuring compliance and mitigating financial consequences.