Share trading and, Derivative trading (F & O trading) is normal now a days. You will not believe nearly 14.3 million new investors added by the depositories in the year ended 31 march 2021. Further, we cannot deny the role of digitalization and platforms available to invest in stock and derivative market.
Most of people step-in into it without having knowledge about its taxability and how it will be shown in their Income tax return? Is it mandatory to show these transactions in return? Require to maintain books of accounts? You will get answer of all of these questions.
Let’s dig deep into this. Assuming you all know about the future and option. Let’s not go into the definition part.
Trading in Future and option is a business transaction. Yes, you read it correctly. as per section 43(5) of the income tax act, 1961. It is non-speculative business income. One can also refer Guidance Note on tax audit by ICAI pg 25.
So, it is clear that Income from “Future and option trading” is a normal business income.
Salaried people who are doing F&O transaction are actually doing business unknowingly. Many are incurring and losses and some are in profit too.
Calculation of turnover for the Income tax purpose before AY 2022-23
Method of calculation of turnover is not provided under the income tax act, 1961. But given in Guidance Note on tax audit by ICAI pg 25 as follows.
(i) The total of favourable and unfavourable differences (Profit/Loss) shall be taken as turnover.
(ii) Premium received on sale of options is also to be included in turnover.
(iii) In respect of any reverse trades entered, the difference thereon, should also form part of the turnover.
Table 1 : Example of calculation of turnover of Futures:
| Future | Units | Buying Rate (C) | Selling Rate (D) | Total Sell | Total Buy | Turnover |
| (A) | (B) | (E=BxD) | (F=BXC) | (G) | ||
| Nifty | 50 | ₹ 16,800 | ₹ 16,250 | ₹ 8,12,500 | ₹ 8,40,000 | ₹ -27,500 |
| Tata Steel | 425 | ₹1,048 | ₹ 1,290 | ₹ 5,48,250 | ₹ 4,45,400 | ₹ 1,02,850 |
| Bank Nifty | 50 | ₹ 35,000 | ₹ 35,000 | ₹ 17,50,000 | ₹ 17,50,000 | ₹ – |
| Total Turnover | ₹ 1,30,350 | |||||
Table 2 : Example of calculation of turnover of Options:
| Options | Units | Buying Rate (C) | Selling Rate (D) | Difference | Premium Received | Turnover |
| (A) | (B) | (E=(D-C)xB | (F=DXB) | (G) | ||
| Nifty 16000CE | 150 | 325 | 220 | ₹ -15,750 | ₹ 33,000 | ₹ 48,750 |
| TataSteel 1200 PE | 425 | 148 | 190 | ₹ 17,850 | ₹ 80,750 | ₹ 98,600 |
| BankNifty 36000 CE | 125 | 455 | 405 | ₹ -6,250 | ₹ 50,625 | ₹ 56,875 |
| Total Turnover | ₹ 2,04,225 | |||||
Calculation of turnover for the Income tax purpose from the AY 2022-23
Law and rules should change according to the need of time. ICAI has also bring some changes in the calculation method of Turnover which fulfils the requirement of the act.
Calculation of the premium will be as follows according to the updated GN on Tax audit U/s 44AB issued by the ICAI.
(i) The total of favourable and unfavourable differences (Profit/Loss) shall be taken as turnover.
(ii) Premium received on sale of options is also to be included in turnover. However, where the premium received is included for determining net profit for transactions, the same should not be separately included.
(iii) In respect of any reverse trades entered, the difference thereon, should also form part of the turnover.
Example of calculation of turnover of Futures same as given in Table 1 above (No change)
Example of calculation of turnover of Options:
In options trading most of the time traders squares off the position if one is the buyer of the call option (premium is paid) he will square off this position by selling this option (Premium will be received) so the differences will be the Profit/loss.
As per new guidance note If the premium is included while calculating net profit than it will not be considered again for the purpose of calculation. If it is not considered for calculation of net profit than Premium will be add to the turnover.
Table 3 : Example of calculation of turnover of Options in where transactions are squared off:
| Options | Units | Buying /Premium Paid (C) | Selling /Premium received (D) | Difference | Premium Received | Turnover |
| (A) | (B) | (E=Bx(D-C) | (F=DXB) | (G) | ||
| Nifty 16000 CE | 150 | 325 | 220 | ₹ -15,750 | ₹ 33,000 | ₹ 15,750 |
| Tata Steel 1200 PE | 425 | 148 | 190 | ₹ 17,850 | ₹ 80,750 | ₹ 17,850 |
| Bank Nifty 36000 CE | 125 | 455 | 405 | ₹ -6,250 | ₹ 50,625 | ₹ 6,250 |
| Total Turnover | ₹ 39,850 | |||||
Requirement of Audit:
Let me remind you again this calculation of turnover is only to determined that what will be the position under income tax. On the basis of turnover, we decide tax audit is required or not.
Section 44AB of the Income tax act,1961 provides that:
“Every person carrying business shall, If his turnover is exceed one crore in any previous year, require to get his accounts audited by an accountant.
In case cash receipts and cash payments does not exceed 5% of total payments or receipts 1Crore will be read as 5Crore. For Financial Year 2021-22 this 5Crore limit is further extended to 10Crore. “
As F&O trading is also falls under the category of eligible business (turnover limit is Rs. 2Crore). So, income can also be shown under section 44AD of the income tax act, 1961 on presumptive basis if assessee also is an eligible assessee.
In this case audit under section 44AB clause (e) of the act, will be required only if declared profits are less than 8% or 6% (As the case may be) of the total turnover.
Note: In all the cases of loss audit is not mandatory. It depends case to case. But in general practice and to deal with future litigation this practice followed.
Maintaining Books of Accounts:
As per section 44AA(2) of the income tax act, 1961,
Every person carrying business, require to maintain books of accounts the Income from the business exceeds Rs. 1,20,000 or the turnover exceed Rs 10Lakh.
(Limit for Individual and HUF (Hindu Undivided Family) of Income is Rs. 2,50,000 and for turnover is Rs25 lakhs.)
One who declaring Income according per section 44AD of the act not require to maintain books of accounts.
But If his income exceed the basic exemption limit not chargeable to tax i.e. Rs. 2,50,000 and profits are not declared according to the provisions of section 44AD then require to maintain books of accounts and also get them audited U/s 44AB.
Can be conclude as
| Case | Opted for 44AD | Declaring profit | Remark |
| 1 | Yes (Turnover is less than Rs. 2Cr.) | According to 44AD | Neither require to maintain books of accounts nor audit |
| 2 | Yes (Turnover is less than Rs. 2Cr.) | Less than 8% or 6% as the case may be or declaring loss | Require to maintain books of accounts and audit. |
| 3 | No (Turnover is less than limit given under 44AB) | Profit or loss whatever is the case | No audit, maintain books of accounts if limit of 44AA is crossed |
| 4 | No (Turnover is more than limit given U/s 44AB) | Profit or loss whatever is the case | Audit and maintaining books of accounts is mandatory |
Accounting Entry for transactions:
One can do accounting on the basis of differences. Let’s take Table 1, Nifty transaction as an example.
Transaction incurred loss of Rs. 27500, Journal entry will be as follows:
| Future and options Profit and loss A/c | Dr. | 27,500 | ||
| To Stock Broker A/c | Cr. | 27,500 | ||
| (Being loss incurred on Nifty Future transaction) | ||||
(Being loss incurred on Nifty Future transaction)
In case profit entry will be reversed.
Or one can also keep record by maintaining inventory. Keep in mind turnover for Income will not match with accounting turnover. Cause to calculate turnover under Income tax absolute figures are considered.
Tax on Income, Set-off and carried forward of losses:
As it is considered as normal business income. Profit from F&O trading will be taxed at normal tax rate applicable to assessee.
Loss can be set off from intra head income except speculative business income and inter head income except salary income.
Loss can be carried forward as “Loss from Business & profession” for next 8 assessment years and can be adjusted with profit and gains for business and profession.
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Disclaimer: This article is solely for educational purpose and cannot be construed as legal and professional opinion. It is based on the interpretation of the author and are not binding on any tax authority. Author is not responsible for any loss occurred to any person acting or refraining from acting as a result of any material in this article. You can reach author at caharshalisalvi@gmail.com
(Republished with amendments on 04.09.2022)
Author Bio
in this year 2023-24 , I have made a profit about 7 lakh through options. I want an expert to fill my I.T. return. kindly help. I have little knowledge about tax return.
Ma’am, I had a query about FNO trades.
When purchasing we credit Share Broker and Debit Share purchase
When selling we Credit Share sales and debit Share broker.
Brokerage is debited as direct expenses in P/L a/c.
Difference is P/L.
The broker charges/pays daily difference for carried over position which is debited or credited to the imprest cash with them. How do we account for that? Create a S/Dr a/c in Current assets? At the end of the year how do we treat the balance in this account?
Thanks for your guidance, in advance.
Hi Madam,
In the article it is said that “Trading in Futures and Options is a Business Transaction and resulting gain or loss is Business Income” .
– In the Pg No. 25 of the Guidance Note on Tax Audit u/s 44AB, Only the manner of computation of turnover in case of Derivatives is given and
– In Sec 43(5) of the Income Tax Act, 1961, It is told that Trading in Derivatives shall not be deemed to be a Speculative Transaction.
No where i could find the reference that, Trading in Derivatives is Business Transaction.
Further, Para 5.15 of the Guidance Note on Tax Audit read with Circular No. 4/2007 dt.15-06-2007 states that whether a transaction of purchase and sale of stocks and shares is a Business Transaction or Investment will depend on the Facts and Circumstances of each case.
Based on this
– whether the trading in derivatives be taken as Business Income or Capital Gains based on the facts of each case or
– whether it always has to be taken as Business Income.
Kindly Clarify.
If the transaction in derivatives has always to be considered as Business Income. Kindly provide the statutory reference of such statement.
I have one query regarding Option Income, Whether option income at actual is more than 6 % or 8%, we have to show actual income or @ 6% or 8% while filing itr, pls clarify.
Yusuf ji, as per law Actual profit must be disclose.
while calculating turnover of F&O, what is the situation for holding open positions of futures. can i show it in p&L and balance she
Hi, P krishna Kishore, Open Position will be shown in Balance sheet
Hi, Can you pls guide which turnover is to be taken for declaring profit @6%, if assessee is not liable for tax audit (as per the TO calculated in presribed manner). Bcoz TO calcualted is only for checking whether tax audit is applicable or not. So for 44AD, should we take normal sale values (Premium rcvd) OR total of negatives and Positives?
Hello Experts.
I am a senior citizen (70 yrs). My main source of income has been interest income of INR 4.5L p.a. However in FY 22-23, I burnt my hand in Options and made a loss of INR 20L on turnover of INR 99L. Do I need to get audit done for filing tax returns and can I carry forward these losses for setoff next year? Thank you
Hello Gopan Ji, To take the decision that audit is require or not some other criteria are also need to consider.
The article was really helpful to me because it discussed some extremely valuable strategies and gave everyone advice on how to start a career in the stock market.
Thank you so much shruti patel ji
Very lucidly elaborated with practical examples. Thank u very much for the clarification on confusing topic.
Thank you CA Rahul ji
what is the tax rate for future and option? if i am in bracket of 30% how much should i need to pay for income through Future and Options?
thanks for the article very useful to me.
Thank you 🙏 D Nirmal Kumar Sir
Tax Guru is very helpful site and please don’t be part of spreading wrong facts either unknowingly or intentionally. Your calculation of turnover is wrong in case of options. It is also absolute difference of buy & sell premiums only. No need to add sale premium for settled/squared off transections. The overall philosophy behind speculative & F&O transection is to consider absolute difference only.
Kamlesh Sanghvi Sir,
Reference for the basis of calculation is mentioned in the article in case of future only absolute Differences will be considered for the T/o calculation and for options absolute difference plus Selling premium.
Professional have differences in opinions. But I would also like to learn more from you on this.
Thanks
CA Harshali Salvi
Expert maxam,
Jay shree krishna,
Thanks for this article. it is a very nice one and understandable,
I have done f & o segment and made a huge loss of 21 lakhs,
if we want to treat F & O for business we have to provide sell and purchase amount in income tax return, as we have to give sell and purchase figures in income tax department.
So shall we provide net figures of each day if credited then sell of that day, and if debited by the broker then purchase for that day, then calculate all sell as total sell and purchase as total purchase.
should these figures be submitted in the IT return ?
Please reply
My mob no is 7878901008,
Thanks
PIYUSH P PATEL
What amount will be taken for turnover or sell/purchase for accounting for maintaining the books of account if tax audit applicable for future and option
Hello Mr. Sachin Gor, Please clarify your question.
Thanks and regards
Harshali Salvi
Madam pls suggest, what turnover should be shown in Form 3CD? The one that is calculated as per the given manner, or the actual sale value?
As per, Income tax rules
There is a question that “pls suggest, what turnover should be shown in Form 3CD? The one that is calculated as per the given manner, or the actual sale value?” your reply is “As per Incometax Act”
Now my question is “don’t you think there will be diffrence in sales shown in P & L Account and in 3CD? because in P & L We will show actual sales value but in 3CD how can we show Turnover as per ICAI guidance note?
Sir I have total turnover of 4CR in F&O .
But I lost 18L in F&O what should I do in this condition
My query – I have consultancy Income. I am having transaction of Future & Option (F&O). In F&O transaction I made loss. 2 queries. 1. Can I net off Loss of F&O with consultancy income ? 2. Is it require to do audit for F&O transaction, if Yes, is there any specific limit of turnover of F&O ?
Mr. Suhas Joshi, You can net of the losses. and yes, there is turnover limit according to applicable section. take help from tax consultant or professional to know actual position in your case.
I have consultancy income and F&O transaction also. Turnover of F&O is Rs. 13 Lakh. I made loss of Rs. 1.65 Lakh. My question is whether audit is necessary for F&O transaction of turnover of Rs. 13 Lakh ?
Mr. Suhas ji,
Decision on audit varies case to case. like your last year return. other Income of sources etc.
Hope you are getting my point. You can also contact me on caharshalisalvi@gmail.com
thank you
Hi Expert,
If i am dealing in F&O and Audit is not applicable based on turnover. However, in any year if loss is incurred can i carry forward that loss without conducting audit? If yes, what type of books of accounts needs to be maintained.
Yes Mr. Akar, you can carry forward the losses for next AY without conducting audit. Books of accounts mentioned in rule of section 44AA of the income tax act.
Hi experts,
If I have 2 businesses, one wherein there are no cash expenses with turnover of approx 75-80 lacs and another business of agency with receipts of 30-35 lacs as commission income. Can I avail benefits of 44AD for my 1st business buy taking taxable income at 6% of turnover and balance tax after incorporating all expenses specifically incurred in agency business.
No Jram ji.
Fairly explained. Good understanding. Thanks for choosing topic.
Thank You S K Bansal ji