What is the official source for options tax turnover calculation?

This is the most popular formula for calculating options turnover.

Net premium received on sale side + Difference between buy and sell price.

On the other hand, we use this formula for futures turnover.

Absolute profit + Absolute loss.

I never sell naked options. I exit my long positions on options frequently, but I never sell an option with the intention to receive the premium on expiry.

  1. Someone told me that we can apply the same formula we use for Futures, in the case of options too. Is that true?

  2. Are there some official definition for options turnover on income tax / other govt website which shows the options turnover formula?

Hi @ProfessionalLo

The method of calculating turnover is a debatable issue. The grey area is that there is no guideline as such from the IT department. However, ICAI has issued a guidance note on tax audit under Section 44AB by ICAI (Institute of chartered accountants of India, the governing body for CA’s). The article on Page 42, Section 5.14 of this guidance note has a guideline on how turnover can be calculated. It says

For all non-speculative transactions (Derivatives, futures, and options), turnover shall include:

  1. The total of favourable and unfavourable differences
  2. Premium received on sale of options is also to be included in turnover
  3. In respect of any reverse trades entered, the turnover shall also include difference thereon.

For Speculative transaction: In the case of intraday there is no actual delivery or transfer of the commodity or scrips. The turnover, in this case, shall be absolute profit i.e the Sum of positive and negative differences between buy and sale value.

As per our opinion, you cannot apply the same formula we use for futures as it clearly mentions that premium is also to be considered in the case of options.

Attaching the link for guidance note: https://resource.cdn.icai.org/34728gn-taxaudit-dtcicai.pdf

Hope this helps :slightly_smiling_face:

@Skinny_Vegan Please delete your comment and create a new thread.

Thank you for the detailed response. You are right.

But what my friend (who is also a CA) told me also makes sense.

ICAI guidelines seem to assume you are selling premium to make a profit by theta decay.

But in my case, I am not selling them in the first leg to make a profit. In my situation, I am just exiting the option trade I made, and the selling option is the second leg of the trade.

I wish there was a way to know what income tax department thinks about this.

Hi @ProfessionalLo

The guidelines issued by ICAI mentions the turnover calculation for all types of transactions.
Therefore we will suggest the same method of turnover calculation irrespective of the the intention or strategy of the the transaction. The turnover of options shall include:

  1. Premium received on sale of options
  2. Absolute profit i.e. the sum of positive and negative differences between buy and sale value.