Futures and Options (F&O) trading has gained immense popularity among both retail and professional traders in India. While most traders focus on technical analysis and strategies, one critical aspect is often overlooked — taxation.

Understanding how F&O income is taxed is essential for compliance, avoiding penalties, and optimising post-tax returns. This guide will walk you through everything you need to know about F&O taxation in India, including income classification, ITR forms, tax audits, allowable expenses, and updated Securities Transaction Tax (STT) rules.

What is F&O Trading?

Futures and Options (F&O) trading refers to the buying and selling of derivative contracts based on underlying assets such as equities, indices, commodities, or currencies. These contracts enable traders to speculate on price movements without owning the actual asset.

While F&O trading can be highly profitable, it also carries significant risk. The Income Tax Department treats F&O trades as business activity, meaning profits or losses are taxed under the head ‘Income from Business or Profession’.

How is F&O Income Taxed?

F&O income is classified as non-speculative business income under the Indian Income Tax Act. Here’s how the taxation works:

  • Profits from F&O trading are added to your total income and taxed at the applicable slab rate.
  • Losses can be offset against other business income (excluding salary) or carried forward for up to eight assessment years.
  • F&O income is not taxed as capital gains, and hence no special tax rates apply.

Reporting F&O Income in Your ITR

1. Choose the Correct ITR Form

  • For individuals, ITR-3 is the appropriate form, as F&O income falls under “business income.”
  • ITR-4 is only applicable under the presumptive taxation scheme, which is not suitable for most active F&O traders.

2. Calculating Turnover in F&O Trading

Why is Turnover Calculation Important?

In the context of F&O trading, turnover does not refer to the total traded value. It is used primarily to:

  • Determine tax audit applicability under Section 44AB
  • Select the appropriate ITR form and income reporting method
  • Estimate total business income from trading

This is particularly important since F&O trades are considered non-speculative business income, not investments.

What is Turnover in F&O?

As per guidelines from the Income Tax Department and ICAI (Institute of Chartered Accountants of India):

Turnover = Sum of absolute profits and losses from all trades in a financial year

In simple terms:

  • Ignore whether a trade made a profit or loss
  • Add the absolute value (positive number) of each outcome

Turnover Formula:

Turnover = |Profit from Trade 1| + |Loss from Trade 2| + |Profit from Trade 3| + …

Example: Turnover Calculation

Suppose your F&O results in FY 2024–25 are:

Trade No.Result
1₹40,000 Profit
2₹25,000 Loss
3₹15,000 Profit
4₹10,000 Loss

Turnover Calculation:

  • Trade 1: ₹40,000
  • Trade 2: ₹25,000
  • Trade 3: ₹15,000
  • Trade 4: ₹10,000

Total Turnover = ₹90,000

This turnover figure is critical for determining whether you need a tax audit and for reporting in your ITR.

3. Claim Allowable Business Expenses

You may deduct expenses directly related to your trading activity, including:

  • Brokerage and transaction charges
  • Internet and phone bills
  • Trading software and subscriptions
  • Advisory or research fees
  • Office rent, staff salaries, and accountant fees

Ensure that all claimed expenses are documented and directly linked to your trading operations.

4. Set Off and Carry Forward Losses

  • F&O losses can be adjusted against any income except salary.
  • If losses cannot be fully set off in the current year, they may be carried forward for eight years, provided they are declared in your return.

Tax Audit Applicability

The requirement for a tax audit for F&O traders depends on your total turnover and the profit declared, structured by thresholds set in the Income Tax Act:

Case 1: Turnover up to ₹2 Crore

  • If you do not opt for the presumptive taxation scheme (Section 44AD):
    • If your profits are less than 6% of turnover (for digital transactions) or 8% (for cash transactions), and your total income exceeds the basic exemption limit (₹2.5 lakhs, ₹3 lakhs, or ₹5 lakhs, depending on age), a tax audit is mandatory.
    • If you declare profits of 6% or more of turnover (for digital transactions), OR you opt for presumptive taxation under Section 44AD and meet the conditions, no tax audit is required.

Case 2: Turnover between ₹2 Crore and ₹10 Crore

  • If at least 95% of your total receipts and payments are digital (not in cash), a tax audit is not required, even if you declare lower profits or report losses.
  • If less than 95% of transactions are digital, a tax audit may still be required if profits are less than the presumptive rate.

Case 3: Turnover above ₹10 Crore

  • A tax audit is compulsory under Section 44AB(a), regardless of the amount of profit or loss declared.

Maintenance of Books of Accounts

Since F&O trading is treated as a business for tax purposes, you are required to maintain proper books of accounts and records if you meet either of the following conditions (for individuals and HUFs):

  • Total income exceeds ₹2.5 lakh, or
  • Total turnover/gross receipts exceeds ₹25 lakh in any of the three preceding financial years.

Note: Different thresholds apply for companies and other entities.

Important Documents to Maintain

  • Daily trade books and contract notes
  • Broker’s Profit & Loss and ledger statements
  • Bank account statements
  • Invoices/receipts for all trading-related expenses

How Are Other Trading Activities Taxed?

Not all trading activity is taxed the same. Here’s how various types are treated:

  • Intraday Equity Trading:
    Treated as speculative business income, taxed at slab rates. Losses can be carried forward for four years.
  • Short-Term Capital Gains (holding < 12 months):
    Taxed at a flat rate of 15%.
  • Long-Term Capital Gains (holding > 12 months):
    Gains exceeding ₹1 lakh are taxed at 10%, without indexation benefits.

Your trading style and holding period affect your tax treatment.

Conclusion

F&O trading offers great opportunities, but it’s crucial to be aware of your tax responsibilities. Since this income is classified as business income, proper tax planning, bookkeeping, and compliance are essential.

FAQs

1. Can F&O trading losses be set off against salary income?
No, F&O losses cannot be set off against salary income. They can only be adjusted against non-salary income, such as business or capital gains.

2. What happens if I don’t report F&O trading in my ITR?
Non-reporting can result in a notice from the Income Tax Department for misreporting or underreporting of income.

3. Do I need a CA to file F&O trading returns?
It’s not mandatory, but highly advisable, especially if your turnover is high or if you’re carrying forward losses or fall under tax audit criteria.

4. Can I file ITR-4 for F&O trading?
Only if you opt for presumptive taxation under Section 44AD and meet all conditions. Generally, active traders need to file ITR-3.