Accounting and Taxation: formula sheet

Key formulas

Head of income

Equity F&O on a recognised exchange → Profits and gains of business or profession

Not capital gains and not income from other sources.

Nature of income

Eligible derivative trade on a recognised stock exchange → non-speculative (proviso to Section 43(5))

Share trades settled without delivery, such as intraday trading, are speculative. Only eligible transactions in derivatives on a recognised stock exchange are excluded from that definition.

Net F&O income

Net income = Total profits − Total losses − Allowable expenses (including STT paid under Section 36(1)(xv), only when the income is business income)

Taxed at the applicable slab rate. STT is not deductible if the income is capital gains. The allowance is subject to the Act as amended.

F&O turnover

Futures: turnover = favourable differences + unfavourable differences. Options: turnover = favourable differences + unfavourable differences + premium received on sale of options

Based on the ICAI Guidance Note. It is not the contract value. Tax audit under Section 44AB works on turnover thresholds, and loss or presumptive taxation (Section 44AD) conditions can also affect it. Check the current limits.

Loss set-off and carry forward

Same year: non-speculative business loss set off against income under any other head except salary (Section 71). Unabsorbed balance: carried forward 8 assessment years, set off only against business income (Section 72)

Section 80 makes carry forward conditional on filing the return by the due date under Section 139(1).

ITR form

Individual with F&O business income → ITR-3

ITR-1 and ITR-2 do not allow business income.

STT on futures

STT = Sale price × Quantity × 0.02%

Charged on the seller only. The buyer pays no STT on futures. Use the rate given in the question.

STT on options (premium)

STT = Premium × Quantity × 0.1%

Charged on the seller of the option, on the premium. Buying an option attracts no STT.

STT on exercised options

STT = Intrinsic value × Quantity × 0.125%

Intrinsic value = settlement price − strike (call) or strike − settlement price (put). Paid by the buyer.

STT and deduction

STT paid on F&O = deductible business expense (section 36(1)(xv))

Applies when F&O income is taxed as business income. It is not part of capital gains cost.

Nature of F&O loss

F&O loss on exchange = non-speculative business loss

Equity derivatives are not speculative transactions, so the speculative rules do not apply.

Same-year set-off

Set off against any head of income except salary

Applies in the year the loss arises. Salary income cannot be reduced by this loss.

Carry forward period

Up to 8 assessment years after the year of loss

Counted from the assessment year immediately following the loss year.

Set-off in later years

Carried-forward loss sets off only against business income

Not against salary, house property, capital gains or other sources.

Filing condition

Return must be filed on or before the due date

Otherwise the business loss cannot be carried forward.

Speculative loss contrast

Speculative loss: set off only against speculative income; carry forward 4 years

Do not apply this to equity derivatives.

Client margin received

Bank (asset) ↑ and Client margin / deposit (liability) ↑

Margin is not income and not the member's own money.

Brokerage

Brokerage earned = Income; GST on brokerage = Liability to government

Only the brokerage portion is revenue.

Client MTM loss

Receivable from client ↑ and Payable to clearing corporation ↑

Member pays the clearing corporation and then recovers from the client.

Client MTM profit

Receivable from clearing corporation ↑ and Payable to client ↑

Credit to the client is made from funds received from the clearing corporation.

Segregation principle

Client funds ≠ Member's own funds

Client money cannot be used for proprietary trades or other clients' dues.

Quick revision

• Income from equity derivatives on a recognised exchange is generally treated as non-speculative business income, not capital gains.
• Non-speculative business losses can generally be set off against income under other heads except salary.
• Speculative losses can be set off only against speculative income.
• To carry forward most business losses, the return must be filed within the due date.
• STT is a tax on the transaction, separate from income tax, and its rates change, so check the current workbook.
• STT on derivatives applies on specified values and sides of the trade, so learn which side and which value for futures and for options.
• For tax audit, the turnover of a derivatives trader is computed by a special method, not simply the contract value.
• Mark-to-market margin paid or received is settled daily and recorded in the books, not left until expiry.
• Option premium paid is an outflow when paid and is settled to profit or loss on exercise, expiry or square-off.
• Brokers and clearing members hold client margins on behalf of clients and do not treat them as their own income.
• Read each option for classification words: speculative, non-speculative, business, capital.

Common mistakes

• Treating F&O profit as capital gains Fix: Remember that derivatives are traded, not held as investments. Their income is business income.
• Calling exchange-traded F&O speculative Fix: The Act specifically excludes derivative trades on a recognised stock exchange, so they are non-speculative.
• Charging STT on both buy and sell legs of futures. Fix: Remember that STT on futures falls on the sell side only.
• Calculating exercise STT on the premium or on the full contract value. Fix: For exercised options, the base is only the intrinsic value: settlement price minus strike for a call.
• Choosing four years for the carry forward period. Fix: Link F&O with non-speculative and eight years. Link speculative with four years.
• Setting off the F&O loss against salary. Fix: Remember the single exclusion: salary. All other heads are allowed in the same year.
• Treating client margin as the member's income Fix: Cash received is not income. Margin is a liability until it is adjusted or returned.
• Treating MTM gains or losses as the member's profit or loss Fix: Record MTM as receivable or payable between client and clearing corporation.

Exam tips

• Expect direct recall questions: head of income, speculative or not, and which ITR form.
• Read the options for 'capital gains' and 'speculative'. Both are common wrong answers for exchange-traded F&O.
• Remember the contrast: intraday shares without delivery are speculative, exchange-traded derivatives are not.
• Learn the 8-year carry forward and the salary exception together as a pair.
• Turnover questions are conceptual. Reject any option based on notional contract value.
• Learn the payer for each case: seller for futures, seller for option premium, buyer for exercised options.
• Watch the base in each case. Price for futures, premium for options, intrinsic value for exercise.
• If the question gives a rate, use it. NISM questions often test the method, not memorised rates.