2 Future & Options (F&O) Accounting, Audit and Taxation

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.

Future & Options (F&O) Accounting, Audit and Taxation

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.

*****

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

Qualification: CA in Practice
Company: Salvi & Associates
Location: INDORE, Madhya Pradesh, India
Member Since: 08 Apr 2019 | Total Posts: 6
I am a practicing chartered accountant. Holding Certificate of "Course on Goods and Service Tax" organized by ICAI. Having 3+ years post qualification experience in Income Tax, GST and auditing. You can reach out to me at caharshalisalvi@gmail.com. For regular updates follow my Facebook page ht View Full Profile

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24 Comments

  1. Shruti Patel says:

    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.

  2. Kamlesh Sanghavi says:

    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.

    1. HARSHALISALVI says:

      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

  3. PIYUSH P PATEL says:

    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

  4. Sachin gor says:

    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

  5. Tarun Maheshwaru says:

    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?

      1. PRASHANT KUMAR VERMA says:

        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?

  6. Suhas Joshi says:

    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 ?

    1. HARSHALISALVI says:

      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.

      1. Suhas Joshi says:

        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 ?

  7. Akar says:

    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.

    1. HARSHALISALVI says:

      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.

  8. Jram says:

    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.

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