Important Keyword: Income from trading, Income Tax, ITR.
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Calculation of Trading Turnover
Income from trading in shares and securities is classified as income from business and profession for tax reporting purposes. To ascertain whether Tax Audit is applicable under the Income Tax Act, it’s essential to calculate the turnover generated from trading activities. It’s important to note that while turnover calculation is crucial for determining Tax Audit applicability, the actual tax liability is not directly dependent on turnover figures.
Turnover calculation is particularly relevant for various trading activities including future and options trading, intraday trading, and share trading, all of which are considered as business activities for tax purposes. Accurate turnover calculation aids in ensuring compliance with tax regulations and facilitates proper assessment of Tax Audit requirements as per the Income Tax Act.
How to calculate Trading Turnover?
Calculating turnover for income tax purposes in trading activities involves different methods depending on the type of trade, such as Equity Intraday, Equity Delivery, Equity F&O, Currency Trading, Commodity Trading, etc. Turnover is determined based on absolute profits generated from trading.
Absolute profit refers to the total of positive and negative differences in trading outcomes. There are two primary methods for calculating trading turnover: the Tradewise method and the Scripwise method. While the Tradewise method is considered more accurate, the Scripwise method is commonly utilized due to its simplicity in turnover calculation.
It’s crucial to understand that regardless of the method used, the overall profit or loss remains consistent. However, there may be significant variations in turnover calculations between the two methods.
Tradewise Turnover
Under the Trade-Wise method, absolute profit is calculated as the sum of the absolute value of profit and loss for each trade conducted during the financial year.
For instance, let’s consider a trader who has executed multiple trades in a given financial year:
Trade 1:
- Buys 400 units of ABC Ltd at INR 100 on 25/01/2022
- Sells 400 units of ABC Ltd at INR 90 on 26/01/2022
Trade 2:
- Buys 200 units of ABC Ltd at INR 45 on 25/02/2022
- Sells 200 units of ABC Ltd at INR 50 on 26/02/2022
To calculate the absolute profit:
- Loss from Trade 1 = (90 – 100) * 400 = Rs. -4,000
- Profit from Trade 2 = (50 – 45) * 200 = Rs. 1,000
Absolute Profit = Rs. 4,000 (Loss from Trade 1) + Rs. 1,000 (Profit from Trade 2) = Rs. 5,000
Scripwise Turnover
Under the Scrip-Wise method, absolute profit is computed as the sum of the absolute value of profit and loss for each scrip traded during the financial year.
For example, let’s consider a trader who has executed multiple trades for a particular scrip within a given financial year:
Trade 1:
- Buys 400 units of ABC Ltd at INR 100 on 25/01/2022
- Sells 400 units of ABC Ltd at INR 90 on 26/01/2022
Trade 2:
- Buys 200 units of ABC Ltd at INR 45 on 25/02/2022
- Sells 200 units of ABC Ltd at INR 50 on 26/02/2022
To calculate the absolute profit:
- Net Loss from Scrip ABC Ltd = Rs. -4,000 (Loss from Trade 1) + Rs. 1,000 (Profit from Trade 2) = Rs. -3,000
Absolute Profit = INR 3,000
Trading Turnover Calculation for Tax Audit Applicability
To ascertain the requirement for Tax Audit, turnover will be computed for Equity, Intraday, and Future and Options (F&O) trading, as illustrated in the following examples.
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 = -200 + 850 = INR 650
Turnover for Equity Delivery Based Trading
If the Equity delivery based trading is considered as a Business income then the turnover calculation will be as below:
| 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 Delivery Based Trading = Sale Value
Tradewise Turnover = 5995 + 5600 = INR 11595
Scripwise Turnover = 5995 + 5600 = INR 11595
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 = -2175 + 9080 = INR 6905
Please note that the calculation for turnover in options trading has been revised according to the eighth edition of the guidance note dated 14/08/2022, effective from Assessment Year 2022-23. Previously, turnover for options trading was determined as “Absolute Profit + Premium on Sale of Options.”
Read More: Business and Profession Codes
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Official Income Tax Return filing website: https://incometaxindia.gov.in/
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