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 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
Calculate Trading Turnover for Equity / Currency / Commodity Options Trading
| Company | Quantity | Buy Date | Buy Price | Sell Date | Sell Price | P/L |
| Bank Nifty Options | 80 | 10/01/2022 | 28.45 | 16/01/2022 | 51.8 | 1868 |
| Bank Nifty Options | 40 | 15/02/2022 | 134.2 | 15/02/2022 | 105.25 | -1158 |
Trading Turnover for Options Trading = Absolute Profit + Premium on Sale of Options
Tradewise Turnover
Absolute Profit = 1868 + 1158 = INR 3026
Premium on Sale of Options = 4144 + 4210 = INR 8354
Tradewise Turnover = 3026 + 8354 = INR 11380
Scripwise Turnover
Absolute Profit = INR 710
Premium on Sale of Options = 4144 + 4210 = INR 8354
Scripwise Turnover = 710 + 8354 = 9064
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. sum of absolute profit and premium on sale of options. 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.
Hey @Divyesh_Patel,
The trading transactions are treated differently under Income Tax. The calculation of turnover from the transactions, calculation of tax amount and checking the applicability of tax audit are different for every situation.
Income Head - Options trading is considered as a business income under income tax
Tax Calculation - Tax is to be paid at slab rates as per income tax act. In your case, there is a loss of Rs.18,000 and thus you are not required to pay tax if you do not have any other income
Carry Forward Loss - You can carry forward the loss for 8 years. It means that the loss of Rs.18,000 can be set off against profit earned in future
Calculation of Turnover
There is a concept of absolute profit under income tax. It is the sum of all positive and negative differences from all trading transactions. Eg: Profit from transaction 1 is Rs.10,000 and loss from transaction 2 is Rs.15,000
Realized Profit = Rs.10,000 - Rs.15,000 = Loss of Rs.5,000
Absolute Profit = Rs.10,000 + Rs.15,000 = Rs.25,000
Turnover of options trading = Absolute Profit + Sales
Hope this helps
