The ICAI Guidance Note on F&O Turnover, Explained: What It Says, What Changed in 2022, and Why Your Broker's Number May Still Be Wrong

Every guide to F&O taxation, including ours, says the same thing: compute turnover “as per the ICAI Guidance Note.” Almost none of them show you the document. That matters, because the Guidance Note is not a formula you can apply blindly — it is a reasoned position on a question the Income-tax Act does not answer, it changed materially in 2022, and a large share of the broker-generated “turnover” figures traders rely on are still built on the version it replaced.

This is what the Guidance Note is, what standing it has, precisely what it says about derivatives, and how to tell whether the number you have been given follows it.

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What the document is

The Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 is published by the Institute of Chartered Accountants of India for the chartered accountants who sign Form 3CB-3CD. It runs to several hundred pages and covers every clause of the audit report. A short section within it — on how “turnover” should be understood for businesses where the ordinary meaning does not fit — is the part every trader has heard of.

The Act itself never defines turnover for derivatives. Section 44AB sets thresholds in terms of “total sales, turnover or gross receipts,” language written for a business that sells goods. A trader who buys a Nifty futures contract and sells it the next day has no “sales” in any commercial sense; the exchange has settled a difference. The Guidance Note fills that gap, and because it is the profession’s considered view, tax auditors follow it, the department’s officers accept it, and the tribunals have repeatedly treated it as the appropriate method.

Its status, precisely: it is guidance to auditors, not law. A trader cannot be penalised for departing from it if a different, reasonable method is applied consistently. But there is no better-supported alternative, and departing from it invites exactly the dispute it exists to prevent.

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What it says about derivatives

For futures and options — described in the Note as transactions in derivatives settled without delivery — the Note directs that turnover be computed as follows:

1. The total of favourable and unfavourable differences is the turnover. Each position’s profit or loss is taken at its absolute value, and the absolute values are summed. A ₹40,000 gain and a ₹25,000 loss produce a turnover of ₹65,000, not ₹15,000 and not the contract value of either position.
2. Premium received on the sale of options is included in turnover — unless it has already been taken into account in computing the net profit or loss on the option, in which case it is not added again.
3. Where reverse trades are entered into, the difference on them is likewise included.

Contract value — the notional exposure a futures or options position represents — appears nowhere in the method. That is the single most important thing the Note establishes, and the single most common way turnover is overstated.

For speculative transactions — intraday equity squared off without delivery — the Note applies the same principle: the aggregate of the absolute differences. The result is reported separately from F&O, because intraday is speculative business under Section 43(5) and F&O is not.

For delivery-based trading held as stock-in-trade, the Note takes the ordinary meaning: the sale value of the shares is turnover. For shares held as investments, there is no turnover at all; the gains are capital gains and Section 44AB is not in play.

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What changed in 2022

The edition of the Guidance Note in force until AY 2021-22 directed that premium received on sale of options be added to turnover as a separate item, on top of the absolute differences. Under that method an option writer who received ₹30,000 of premium and closed the position for a ₹12,000 profit had turnover of ₹42,000 from that trade.

The 2022 revised edition, applicable from AY 2022-23, added the qualification: premium is included only where it is not already reflected in the profit or loss. On a modern broker’s tax statement the option’s profit or loss already incorporates the premium — ₹30,000 received, ₹18,000 paid to close, ₹12,000 profit — so nothing is added, and that trade’s turnover is ₹12,000.

The effect is large for anyone who writes options. A seller of weekly index options can collect premium in the tens of lakhs over a year while netting a modest result; under the old method, the premium inflated turnover toward the audit threshold and, for those under 44AD, toward a deemed profit on a number that was never income. The revision brought the method into line with what the trade actually produced.

	Pre-2022 method	2022 revised method
Sold a call for ₹30,000, bought back at ₹18,000	₹12,000 difference + ₹30,000 premium = ₹42,000	₹12,000 difference, premium already reflected = ₹12,000
Sold a put for ₹20,000, expired worthless	₹20,000 difference + ₹20,000 premium = ₹40,000	₹20,000 difference = ₹20,000
Bought a call for ₹15,000, sold at ₹22,000	₹7,000 difference = ₹7,000	₹7,000 difference = ₹7,000

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Why your broker’s number may still be wrong

Brokers began adding a “turnover” figure to tax profit-and-loss statements around the time the department started matching derivative activity in the AIS. Not all of them have updated the computation, and none of them is responsible for its correctness in your audit. The three patterns we see:

• Contract value reported as turnover. Some platforms sum the notional value of every contract traded. A retail account shows tens of crores. This follows no edition of the Guidance Note and is simply wrong.
• The pre-2022 method. Premium on options sold added on top of the absolute differences. Common in older report templates, and materially overstated for option writers.
• The 2022 method, correctly applied. Absolute differences only, with premium captured through the position result.

The test is quick: find one option you sold and closed, and check whether the report’s turnover for it equals the profit or loss on the position, or the profit or loss plus the premium. If the latter, the report is on the old method, and every option you wrote in the year is overstated.

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Where the number goes

The Guidance Note’s turnover figure feeds three decisions, and it is the same figure for all three:

Decision	Threshold	Consequence of overstating
Tax audit under 44AB	₹10 crore for digital businesses	An audit that was never required, at your cost
Presumptive taxation under 44AD	Deemed profit of 6% of turnover	Tax on income you did not earn
Books of account under 44AA	Books required above ₹25 lakh turnover or ₹2.5 lakh income	A compliance obligation triggered on a wrong figure

A trader whose broker reports ₹8 crore of contract value against ₹1.6 lakh of Guidance-Note turnover is at 80% of the audit threshold on one number and 1.6% on the other. Our article on F&O turnover and the 44AB limit works the full example and explains the 44AD trap that actually causes most F&O audits.

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What the Note does not settle

Two questions come up that the Guidance Note leaves to judgement.

Whether a trader’s delivery holdings are investments or stock-in-trade. The Note assumes you have already classified them; it tells you how to compute turnover once you have. The classification itself follows the CBDT’s circulars on the point — consistency of treatment, holding period, frequency, and the taxpayer’s own stated intention — and it decides whether a large part of your activity is even within Section 44AB.

Whether expired options are “transactions.” The Note’s method requires a difference to compute. An option bought and allowed to expire has a loss equal to the premium paid; an option sold and allowed to expire has a profit equal to the premium received. Both are differences and both are included. Some practitioners once argued that expiry was not a “transaction”; the better view, and the one the tribunals have accepted, is that the position was closed by expiry and the result counts.

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Frequently asked questions

Is the ICAI Guidance Note binding on the Income Tax Department?

No. It is guidance issued by the Institute to auditors. But it is the only systematic method for derivative turnover, tax auditors apply it, the department accepts it in practice, and the tribunals have consistently treated it as the appropriate basis. A trader who follows it is on the strongest available ground.

What did the 2022 revision of the Guidance Note change for F&O?

Premium received on the sale of options is no longer added to turnover where it is already reflected in the profit or loss on the position. Under the earlier edition it was added separately, which overstated turnover for option writers.

Does contract value count towards F&O turnover?

No, under any edition of the Guidance Note. Turnover is the sum of the absolute profits and losses on each position. Contract or notional value is irrelevant.

My broker’s report shows a turnover figure. Can I use it directly?

Only after checking the method. Test one option you sold and closed: if the report’s turnover for it equals the position’s profit or loss, the 2022 method has been applied; if it equals the profit or loss plus the premium, the report is on the old method and overstates every written option.

Is intraday turnover computed the same way as F&O?

Yes — the aggregate of absolute differences — but it is reported separately, because intraday equity is speculative business under Section 43(5) and F&O is non-speculative. The two are not netted, and their losses carry forward under different rules.

Does an option that expires worthless count in turnover?

Yes. Expiry closes the position. A bought option that expires is a loss equal to the premium paid; a sold option that expires is a profit equal to the premium received. Both are absolute differences and both are included.

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Related reading

• F&O Turnover for Tax Audit: the ICAI Method, the ₹10 Crore Limit, and the 44AD Trap
• ITR for F&O Traders FY 2025-26: Tax Audit & Turnover Guide
• Stock Market or F&O Income Not Reported? The AIS Mismatch Notice
• Stock Market & F&O Taxation — our service
• Tax Audit under Section 44AB — our service