Futures & Options (F & O) Turnover calculation (with examples) as per Guidance Note on Tax Audit

Article Explains F & O transaction is taxable as business income or as a capital gain, Which share transactions are speculative in nature and which is a non – speculative transaction, How to calculate turnover in the case of Futures & Options? (With example), Taxation of Income Earned from Intra day Trading & Future & Options, Basic terms of the Share Market and whether BTST is Considered a Speculative business Income or not.

1. Basic terms of the Share Market

What is a share?

  • Shares are units of equity ownership in a corporation Bought a share of X Company, you are a shareholder/owner of that company.

E.g., Bought share of HDFC Bank, you are a shareholder/owner of HDFC Bank.

What is derivative?

A derivative means an instrument whose value is derived. It has no value of its own. Its price is based on the underlying asset. Derivatives of indices (Nifty, Bank Nifty) & Stocks can be traded on NSE. The most popular form of derivatives are futures & options (F&O).

What is Futures?

A futures contract means an agreement to buy or sell on a future date. This contract expires on a pre-set date. On expiry, futures are executed by delivery of the underlying asset or via payment. (Monthly Contracts of Nifty).

What is Forward?

A forward contract is a customizable derivative contract between two parties to buy or sell an asset at a specified price on a future date. Forward contracts can be tailored to a specific commodity, amount, and delivery date.

What is options?

Options are a type of derivative product that allows investors to hedge against the volatility of an underlying stock. (Weekly & Monthly contracts)

2. Which share transaction is speculative in nature & which is not?

For the answer to the above question,

We must refer to Section 43(5) of the Income Tax Act 1961, the relevant extract of which is reproduced below:

Extract of Section 43(5) of the Income Tax Act 1961

(5) “Speculative transaction” means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips:

Provided that for the purposes of this clause—

(a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or

(b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or

(c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; or

(d) an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange;

Or (e) an eligible transaction in respect of trading in commodity derivatives carried out in a [recognised stock exchange], which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013),

shall not be deemed to be a speculative transaction:

Provided further that for the purposes of clause (e) of the first proviso, in respect of trading in agricultural commodity derivatives, the requirement of chargeability of commodity transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013) shall not apply.

Explanation 1. —For the purposes of clause (d), the expressions—

(i) “eligible transaction” means any transaction, —

(A) carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and

(B) which is supported by a time stamped contract note issued by such stockbroker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act;

(ii) “recognised stock exchange” means a recognised stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfills such conditions as may be prescribed and notified by the Central Government for this purpose.

Explanation 2. —For the purposes of clause (e), the expressions—

(i) “commodity derivative” shall have the meaning as assigned to it in Chapter VII of the Finance Act, 2013;

(ii) “eligible transaction” means any transaction, —

(A) carried out electronically on screen-based systems through member or an intermediary, registered under the byelaws, rules and regulations of the 96[recognised stock exchange] for trading in commodity derivative in accordance with the provisions of the Forward Contracts (Regulation) Act, 1952 (74 of 1952) and the rules, regulations or byelaws made, or directions issued under that Act on a 96[recognised stock exchange]; and

(B) which is supported by a time stamped contract note issued by such member or intermediary to every client indicating in the contract note, the unique client identity number allotted under the Act, rules, regulations or byelaws referred to in sub-clause (A), unique trade number and permanent account number allotted under this Act;

[(iii) “recognised stock exchange” means a recognised stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose;]

Conclusion:

Derivatives include commodity derivatives on receognised stock exchanges.

Speculative business income: Income from intraday equity trading is considered speculative in nature.

Non-speculative business income: Income from trading F&O (both intraday and carry forward) is considered a non-speculative business.

3. whether BTST is Considered a Speculative business Income or not?

No, it is not a speculative income. You think we did not get actual delivery of share so as per section 43(5) of speculative transaction so it comes under the definition. Yes we did not get the delivery of shares because before delivery we sold these shares but we pay delivery charges on such transactions so IMO, so It is Non-speculative Business Income.

4. Futures, Options & Intraday Turnover Calculation with Examples for Income Tax

First, we will read Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 – AY 2022-23

The turnover or gross receipts in respect of transactions in shares, securities and derivatives may be determined in the following manner:

(a) Speculative transaction: A speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. Thus, in a speculative transaction, the contract for sale or purchase which is entered into is not completed by giving or receiving delivery so as to result in the sale as per value of contract note. The contract is settled otherwise and squared up by paying out the difference which may be positive or negative. As such, in such transaction the difference amount is ‘turnover’. In the case of an assessee undertaking speculative transactions there can be both positive and negative differences arising by settlement of various such contracts during the year. Each transaction resulting into whether a positive or negative difference is an independent transaction. Further, amount paid on account of negative difference paid is not related to the amount received on account of positive difference. In such transactions though the contract notes are issued for full value of the purchased or sold asset, the entries in the books of account are made only for the differences. Accordingly, the aggregate of both positive and negative differences is to be considered as the turnover of such transactions for determining the liability to audit vide section 44AB.

(b) Derivatives, futures and options: Such transactions are completed without actual delivery of shares or securities or commodities etc. These are squared up by receipts/payments of differences. The contract notes are issued for the full value of the underlined shares or securities or commodities etc. purchased or sold but entries in the books of account are made only for the differences. The transactions may be squared up any time on or before the striking date. The buyer of the option pays the premia. The turnover in such types of transactions is to be determined as follows:

(i) The total of favorable and unfavorable differences 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.

(c) Delivery based transactions: Where the transaction for the purchase or sale of any commodity including stocks and shares is delivery based whether intended or by default, the total value of the sales is to be considered as turnover.

Confuses

Let’s see how to calculate the turnover of Futures and options by taking an example.

i. How to Calculate Futures Turnover for Income Tax purpose with Examples

Futures

Transactions Qty Buy Sell Realized P&L
A 25 804250 807750 3500
B 3702 3068167 3099264 31096
C 3600 3037500 3030300 -7200
D 2800 604580 608000 -6580
E 550 508675 507025 -1650
F 4000 702400 708400 6000
G 3400 3000755 3009000 8245
1,17,26,327 1,17,69,739 33411.8

From a layman’s point of view, total sales will be turnover, but It is not in the case of Futures and options transactions.

Step No.1

Sum of Net profit (favorable turnover) = 3500+31096+6000+8245 = 48841

Step No.2

Sum of Net Loss to this calculation we took positive figures of Net Losses like (unfavorable turnover) =

7200+6580+1650 = 15430

Final Step No.3

Absolute Turnover = The total of favorable and unfavorable differences shall be taken as turnover. = 48841 + 15430

= 3500+31096+7200+6580+1650+6000+8245

Turnover of Futures = 64271/-

ii. How to Calculate Turnover of of Options for Income Tax Purposes with Examples

Options

Transactions Qty Buy Sell Realized P&L
1 50 2500 1750 -750
2 50 26000 10000 -16000
3 25 10125 10750 625
4 25 8791 9300 509
5 25 10000 10375 375
6 250 59017 63502 4485
7 300 82517 50000 -32517
198950 155677 -43273

Step No. 1

Calculation of Turnover of Profitable options Transactions

Transactions Qty Buy Sell Realized P&L Turnover
3 25 10125 10750 625 625
4 25 8791 9300 509 509
5 25 10000 10375 375 375
6 250 59017 63502 4485 4485
Total 5994

Step No. 2

Calculation of Turnover of Loss-making options Transactions

Transactions Qty Buy Sell Realized P&L Turnover

(Buy Value)

1 50 2500 1750 -750 2500
2 50 26000 10000 -16000 26000
7 300 82517 50000 -32517 82517
111017

Step No. 3

Total Turnover = Turnover of Profitable options Transactions + Turnover of Loss-making options Transactions

= 5994+111017 = 117011

iii. How to calculate Intraday equity Turnover for Income Tax Purposes?

Shares Intraday – See definition above as per section 43(5) of Income tax

Symbol Qty Buy Sell Realized P&L
1 175 9826 9712 -114
2 145 52345 50000 -2345
3 135 64057 64350 293
4 85 63176 63325 149
5 175 62097 62000 -97
6 464 178803 180046 1243
430304 429433 -871

Step No.1

Sum of Net profit (favorable turnover) = 293+149+1243 = 1685

Step No.2

Sum of Net Loss to this calculation we took positive figures of Net Losses like (unfavorable turnover) =

+114+2345+97 = 2556

Final Step No.3

Absolute Turnover = The total of favorable and unfavorable differences shall be taken as turnover.

= 293+149+1243+114+2345+97 = 1685+2556

Turnover of Futures = 4241/-

Q. Intraday of F&O how can we calculate turnover?

A. Same as Per Normal F&O, No changes

5. Taxation of Income Earned from Intra day Trading & Future & Options

i. Taxation of Intraday equity Profit or Loss

Intraday equity Profit is treated as speculative business Profit calculate as per Normal Slab Rate

Intraday equity Loss is treated as speculative business Loss that can only be set off against speculative business profit & Such can be Carry Forward for 4 years

ii. Taxation of Future & Options Profit or Loss

F&O Profits are treated as non-Speculative business profits calculate as per Normal Slab Rate

F&O Loss is treated as a non-Speculative business Loss that can set off against any income other than Salary Income. Such can be Carry Forward for 8 years

Capital Gains taxation is covered under this article https://taxguru.in/income-tax/tax-harvesting-difficult.html

#incometax #Intraday #Guidance_note_2022 #futuresandoptions #Turnover_calculation

Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Neither the author nor its affiliates accept any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.

Author Bio

Qualification: CA in Practice
Company: BMSH & Associates LLP
Location: Ichalkaranji, Maharashtra, India
Member Since: 17 Aug 2022 | Total Posts: 4
He is a Practicing Chartered Accountant. His Youtube Channel is "CA Shahenshaha Mujawar" which contains videos on Tax Awareness, Money management, and financial literacy. View Full Profile

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