Traders: Calculation of Trading Turnover

Author
By Sakshi Shah on February 25, 2020

Any person having income from trading in shares and securities should report it as income from business and profession. To determine the applicability of Tax Audit as per the Income Tax Act, we should calculate Trading Turnover for such income. It is important to note that tax liability does not depend on Turnover. The trading turnover should be calculated only when the share trading income is considered as a business income and not when it is considered as capital gains income.

How to treat sale of shares: Capital Gains or Business Income

The method to calculate trading turnover is different for each type of trading i.e. Equity Intraday, Equity Delivery, Equity F&O, Currency Trading, Commodity Trading etc. To understand how it is calculated, we need to understand the meaning of Absolute Profit.

Absolute Profit

Absolute Profit means the sum of positive and negative differences. It is the sum of the absolute value of profit and loss of each trade during the financial year.

Example

  • Trade 1
    • Trader buys 400 units of Scrip 1 at Rs.100 on 25/01/2020
    • Trader sells 400 units of Scrip 1 at Rs.90 on 26/01/2020
  • Trade 2
    • Trader buys 200 units of Scrip 2 at Rs.45 on 25/01/2020
    • Trader sells 200 units of Scrip 2 at Rs.50 on 26/01/2020
  • Absolute Profit
    • Loss from Trade 1 = (90-100) * 400 = Rs. -4,000
    • Profit from Trade 2 = (50-45) * 200 = Rs. 1,000
    • Absolute Profit = 4000+1000 = Rs. 5,000

Method to Calculate Trading Turnover

Trading Type Trading Turnover
Equity Intraday Trading Absolute Profit
Equity Delivery Trading Sales Value
Equity F&O Trading Futures – Absolute Profit
Options – Absolute Profit + Premium on Sale of Options
Currency Trading (Equity / Intraday / F&O) Futures – Absolute Profit
Options – Absolute Profit + Premium on Sale of Options
Commodity Trading (Equity / Intraday / F&O) Futures – Absolute Profit
Options – Absolute Profit + Premium on Sale of Options

Examples

Equity Intraday Trading

  • On 25/10/2018 you buy 5 shares of Britannia at Rs. 5390 and sell them on the same day at Rs. 5350. Loss = (5350-5390)*5 = Rs. -200
  • On 24/10/2018 you buy 17 shares of RBL Bank at Rs. 483 and sell them on the same day at Rs. 488. Profit = (488-483)*17 = Rs. 85
  • Trading Turnover = Absolute Profit = 200+85 = Rs. 285

Equity Delivery Trading

  • On 14/11/2018 you buy 2 shares of Britannia at Rs. 5855 and sell them on 26/11/2018 at Rs. 5995. Profit = (5995-5855)*2 = Rs. 280
  • On 14/02/2019 you buy 9 shares of Hindustan Unilever at Rs. 1784 and sell them on 18/03/2019 at Rs. 1697. Loss = (1698-1784)*9 = Rs. -774
  • Trading Turnover = Sales Value = 2(5995)+9(1697) = Rs. 27,263

Equity / Currency / Commodity Futures Trading

  • On 17/01/2019 you buy 75 units of Bank Nifty Futures at Rs. 10,922.95 and sell them on 18/01/2019 at Rs. 10,893.35. Loss = (10893.35-10922.95)*75 = Rs. -2220
  • On 05/04/2018 you buy 40 units of Bank Nifty Futures at Rs. 24,624 and sell them on the same day at Rs. 24851.7. Profit = (24851.7-24624)*40 = Rs. 9,108
  • Trading Turnover = Absolute Profit = 2220+9108 = Rs. 11,328

Equity / Currency / Commodity Options Trading

  • On 11/09/2019 you buy 80 units of Bank Nifty Options at Rs. 28.45 and sell them on the same day at Rs. 51.8. Profit = (51.8-28.45)*80 = Rs. 1,868
  • On 12/09/2019 you buy 40 units of Bank Nifty Options at Rs. 134.2 and sell them on the same day at Rs. 105.25. Loss = (105.25-134.2)*40 = Rs. -1,158
  • Trading Turnover = Absolute Profit + Sales
    • Absolute Profit = 1868+1158 = Rs. 3,026
    • Sales = 80(51.8) + 40(105.25) = 4144 + 4210 = Rs. 8,354
    • Trading Turnover = Absolute Profit + Sales = 3026 + 8354 = Rs. 11,380

FAQs

1. Is Trading Turnover same as Contract Turnover?

No. Trading Turnover is different than Contract Turnover.
Contract Turnover is the sum of the purchase value and sales value. It is not considered for income tax purpose. Trading Turnover or Business Turnover is the absolute profit i.e. sum of positive and negative differences. This turnover is considered to determine the applicability of the tax audit and the applicable ITR form.

2. I am an Intraday Trader. How do I calculate trading turnover to determine the applicability of a tax audit?

To determine whether a tax audit is applicable or not, calculate the trading turnover. In the case of Equity Intraday Trading, Absolute Profit is Trading Turnover. Absolute Profit means the sum of positive and negative differences. Eg: Loss from Scrip 1 is Rs. -5000 and profit from Scrip 2 is Rs. 8000, absolute profit = 5000+8000 = Rs. 13,000. If the turnover exceeds Rs. 1 Cr then tax audit is applicable.

3. I am an F&O Trader. How do I calculate trading turnover to determine the applicability of a tax audit?

To determine whether a tax audit is applicable or not, calculate the trading turnover. If you are trading in Futures, Absolute Profit is Trading Turnover. Absolute Profit means the sum of positive and negative differences. Eg: Loss from Scrip X is Rs. -5000 and profit from Scrip Y is Rs. 8000, absolute profit = 5000+8000 = Rs. 13,000. If you are trading in Options, trading turnover = Absolute Profit + Premium on sale of options. If the total trading turnover exceeds Rs. 1 Cr, tax audit is applicable.