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 calculation should be done only when the income from shares is considered as a business income and not when it is considered as capital gain income.
The method to calculate turnover for Income Tax on trading is different for each type of trade 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 for Trading Turnover Calculation
There are two methods for calculation of trading turnover – Tradewise method and Scripwise method. Ideally, tradewise method is the correct way of calculating turnover. However, scripwise method is widely used since it makes the turnover calculation easy.
It is important to note that the Profit/Loss shall be the same under both methods. However, there would be a large difference in the turnover calculation.
Tradewise Turnover
Absolute Profit means the sum of positive and negative differences. Under this method, absolute profit is the sum of the absolute value of profit and loss of each trade during the financial year.
For Example:
- Trade 1
- Trader buys 400 units of ABC Ltd at INR 100 on 25/01/2022
- Trader sells 400 units of ABC Ltd at INR 90 on 26/01/2022
- Trade 2
- Trader buys 200 units of ABC Ltd at INR 45 on 25/02/2022
- Trader sells 200 units of ABC Ltd at INR 50 on 26/02/2022
- 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
Scripwise Turnover
Absolute Profit means the sum of positive and negative differences. Under this method, absolute profit is the sum of the absolute value of profit and loss of each scrip during the financial year.
For Example:
- Trade 1
- Trader buys 400 units of ABC Ltd at INR 100 on 25/01/2022
- Trader sells 400 units of ABC Ltd at INR 90 on 26/01/2022
- Trade 2
- Trader buys 200 units of ABC Ltd at INR 45 on 25/02/2022
- Trader sells 200 units of ABC Ltd at INR 50 on 26/02/2022
- Absolute Profit
- Net Loss from Scrip ABC Ltd = -4000 +1000 = -3000
- Absolute Profit = INR 3,000
Method of Trading Turnover Calculation for Tax Audit Applicability
To determine the applicability of Tax Audit, below are the examples for calculation of turnover for different types of trading.
Calculate Trading Turnover for Equity Intraday Trading
| Company | Quantity | Buy Date | Buy Price | Sell Date | Sell Price | P/L |
| Britannia | 5 | 25/10/2021 | 5390 | 25/10/2021 | 5350 | -200 |
| Britannia | 17 | 24/11/2021 | 4830 | 24/11/2021 | 4880 | 850 |
Trading Turnover for Equity Intraday Trading = Absolute Profit
Tradewise Turnover = 200 + 850 = INR 1050
Scripwise Turnover = INR 650
Calculate Trading Turnover for Equity Delivery Trading
| Company | Quantity | Buy Date | Buy Price | Sell Date | Sell Price | P/L |
| Britannia | 2 | 14/11/2021 | 5855 | 26/11/2021 | 5995 | 280 |
| Britannia | 9 | 10/02/2022 | 5740 | 10/03/2022 | 5600 | -1260 |
Trading Turnover for Equity Intraday Trading = Absolute Profit
Tradewise Turnover = 280 + 1260 = INR 1540
Scripwise Turnover = -980 = INR 980
Calculate Trading Turnover for Equity / Currency / Commodity Futures & Options Trading
| Company | Quantity | Buy Date | Buy Price | Sell Date | Sell Price | P/L |
| Bank Nifty Futures | 75 | 17/01/2022 | 10922 | 20/01/2022 | 10893 | -2175 |
| Bank Nifty Futures | 40 | 05/02/2022 | 24624 | 05/02/2022 | 24851 | 9080 |
Trading Turnover for Futures Trading = Absolute Profit
Tradewise Turnover = 2175 + 9080 = INR 11255
Scripwise Turnover = INR 6905
Note: The turnover calculation for options has been updated based on the eighth edition of the guidance note dated 14/08/2022 (w.e.f A.Y 2022-23). Previously, turnover for options trading was calculated as “Absolute Profit + Premium on Sale of Options.”
FAQs
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.
To determine whether a tax audit is applicable or not for equity intraday trading, calculate the trading turnover i.e. absolute profit. Absolute Profit means the sum of positive and negative differences. Check if tax audit is applicable as per Section 44AB after calculating the trading turnover.
To determine whether a tax audit is applicable or not for F&O trading, calculate the trading turnover i.e. absolute profit. Absolute Profit means the sum of positive and negative differences. Check if tax audit is applicable as per Section 44AB after calculating the trading turnover.
Tradewise turnover calculates absolute profit as the sum of the absolute value of profit and loss of each trade during the financial year. Scripwise turnover calculates absolute profit as the sum of the absolute value of profit and loss of each scrip (aggregate of all trades for every scrip) during the financial year. Under both the methods, the turnover amount will vary but the amount of profit/loss remains the same.
Hi @Vik
When calculating turnover for a future contract, it is important to consider the realized profit and loss (P&L).
In your scenario, if the contract is sold on the 10th day from the date of buying and has appeared as a loss for 9 days, you should include both the realised loss and profit on the date of sale in the turnover calculation.
For example, you have a realised loss of ₹100 and profit of ₹300, then after calculation your turnover would be ₹400, and your Net P&L would be ₹200.
Hope it helps.
@Vik
In this stated case, the turnover would be realized profit that is ₹10 (₹110 - ₹100). The closing price mentioned by you on the 2nd - 5th Jan are the unrealized losses which are not considered for the calculation of turnover
Here, in your previous scenario as well the losses for 9 days has to be ignored as they’re not realized and the 10th day realized profit needs to be considered.
Read more about Trading Turnover Calculation for Trading Income - Learn by Quicko.
Hope this clarifies your query.
Hi @Surresh
Yes, you will be required to file ITR 3 since you will be reporting F&O & Intraday income. in your ITR.
Hi @vsvdevan
As per the latest guidelines by ICAI, the turnover is calculated as the absolute profit/loss in case of both, futures & options. Here’s a read on turnover calculation for F&O for your reference.