In recent updates, the method to compute income from futures and options (F&O) trading (treated as speculative business income) has shifted from the traditional mark-to-market approach to a turnover-based method. Here's how it works: Step 1: Determine Your Turnover Turnover Calculation:For FRead more
In recent updates, the method to compute income from futures and options (F&O) trading (treated as speculative business income) has shifted from the traditional mark-to-market approach to a turnover-based method. Here’s how it works:
Step 1: Determine Your Turnover
- Turnover Calculation:
For F&O trading, the turnover is now defined as the aggregate sale consideration of all contracts you traded during the financial year.- This means you add up the sale prices of all the futures and options contracts sold (closed positions) during the year.
- Even if the positions are not delivered (i.e., contracts are closed out), the sale consideration is included in your turnover.
Step 2: Deduct the Purchase Cost
- Purchase Cost:
From the total turnover, subtract the total cost of acquiring these contracts (the purchase price paid when entering the contracts).
Step 3: Deduct Direct Expenses
- Direct Trading Expenses:
Deduct all direct expenses incurred in trading, such as:- Brokerage fees
- Transaction charges
- Clearing and settlement fees
- Any other costs directly attributable to the trading activity
Step 4: Arrive at Your Net Profit or Loss
- Net Speculative Business Income:
The result after these deductions is your net profit (or loss) from F&O trading. This figure is treated as speculative business income and is taxed at your applicable business income slab rates.
Summary Table
| Calculation Step | Description | Formula |
|---|---|---|
| Turnover | Sum of sale consideration of all F&O contracts traded | Total Sale Consideration |
| Less: Purchase Cost | Total cost incurred to buy the contracts | Sum of Purchase Prices |
| Less: Direct Expenses | Expenses directly related to trading (brokerage, transaction fees, etc.) | Total Direct Expenses |
| Net Income | This is the taxable speculative business income from F&O trading | Turnover – Purchase Cost – Direct Expenses |
Key Points to Remember
- Revised Method:
- The revised approach focuses on the actual sale consideration (turnover) rather than solely relying on the mark-to-market adjustments.
- Business Expense Approach:
- This method is similar to computing turnover in a typical business: you start with gross sales (in this case, sale consideration) and then deduct the cost of goods sold (purchase cost) and other direct expenses to arrive at net profit.
- Taxation:
- The resulting net profit or loss is considered speculative business income and is subject to tax according to the applicable slab rates for business income.
Read: How to calculate capital gain on intra-day trading of shares?
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When it comes to intra-day trading (buying and selling shares on the same day), the Income Tax Act does not treat the profits as capital gains. Instead, such trading is classified as speculative business income. This means the traditional capital gains computation method doesn’t apply. Key Points NoRead more
When it comes to intra-day trading (buying and selling shares on the same day), the Income Tax Act does not treat the profits as capital gains. Instead, such trading is classified as speculative business income. This means the traditional capital gains computation method doesn’t apply.
Key Points
Not Capital Gains:
Intra-day transactions are considered speculative because the shares are not actually delivered; they are bought and sold within the same day. Thus, the profits or losses from these transactions are treated as business income.
Calculation as Speculative Business Income:
To compute your net income from intra-day trading, follow these steps:
Calculate Turnover:
Sum up the sale consideration of all intra-day trades (i.e., the total amount received from selling shares).
Deduct Purchase Cost:
Subtract the total purchase cost of those trades (i.e., the total amount paid to buy the shares).
Deduct Direct Trading Expenses:
Also deduct any brokerage fees, transaction charges, and other direct expenses incurred while trading.
Net Speculative Business Income:
The resulting amount is your net profit (or loss) from intra-day trading, which will be taxed as business income according to your applicable slab rates.
Example Calculation
Additional Considerations
Set-Off & Carry Forward of Losses:
Losses from speculative transactions can only be set off against speculative income and can be carried forward for one year.
Record-Keeping:
It’s important to maintain detailed records (trade confirmations, brokerage statements, etc.) for each transaction to substantiate your calculations.
Read: How to calculate capital gain on future and options trading?
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