F&O turnover

A trader who buys and sells the same share ten times in a day has not "turned over" ten times the value of the shares, the way a shopkeeper turns over stock. F&O trading needs its own way of measuring turnover, because most contracts are settled in cash, not by delivering anything.

The Income Tax Act itself is silent on how to compute this. The rule instead comes from the ICAI's Guidance Note on Tax Audit.

Getting the turnover figure right matters for two very practical reasons: it decides whether a tax audit is compulsory, and it decides whether the trader can opt for a simpler, presumptive way of paying tax.

The ICAI method, as the workbook states it:

1. The total of favourable and unfavourable differences on each settled position is added up as turnover — profits and losses are both added as positive amounts, not netted against each other.
2. Premium received on the sale of options is also added to turnover.
3. Reverse trades (a position squared off before expiry) contribute their own difference to turnover as well.

Why the figure matters — tax audit. Once total turnover is known, it determines whether the trader must get their accounts audited under the Income Tax Act.

Why the figure matters — presumptive taxation. Under Section 44AD, a trader whose turnover does not exceed Rs 2 crore (or Rs 3 crore, where receipts are substantially through banking or digital channels) can instead declare profit as a flat percentage of turnover: 6% where receipts are in cheque or digital mode, 8% where they are in cash. Once declared this way, no further expenses can be claimed or disallowed against it, and the trader is not required to maintain books under Section 44AA or have them audited.

Mr Sethi trades index options during the year. His transactions:

Trade 1: Sold options, premium received                        Rs 3,00,000
Trade 1 closed favourably, profit (difference)                  Rs 1,20,000
Trade 2: Bought and later sold futures, loss (difference)       Rs   80,000
Trade 3 (reverse trade squared off early), profit (difference)  Rs   40,000

F&O turnover = 3,00,000 (option premium) + 1,20,000 (favourable) +
               80,000 (unfavourable, added as positive) + 40,000 (reverse trade)
             = Rs 5,40,000

Since this is comfortably under the Rs 2 crore threshold, Mr Sethi has no audit requirement, and if his receipts are mostly digital he can choose to declare presumptive income under Section 44AD at 6% of Rs 5,40,000 = Rs 32,400, with no separate expense claims and no books of account required.

Chapter 11 (Taxation of Equity Products), sections 11.7.2 to 11.7.5, cover the nature of F&O income, the ICAI turnover computation, the presumptive scheme under Section 44AD, and set-off of F&O losses. Expect a question requiring you to compute turnover from a short list of trade outcomes, then decide whether a tax audit or the presumptive scheme applies.

• Losses are added as positive amounts to turnover, never netted against profits. A candidate who nets favourable and unfavourable differences will understate turnover.
• Premium received on selling options is added to turnover in full, regardless of whether the option was later exercised.
• The Income Tax Act itself has no turnover formula — it comes entirely from the ICAI Guidance Note, which the exam expects you to know by name.
• The 6%/8% presumptive rates depend on the mode of receipt (digital versus cash), not on the trader's choice.
• F&O is treated as non-speculative business income, even without delivery, because Section 43(5) excludes derivative transactions from the definition of speculative transaction — do not tax F&O losses as speculative losses.