F&O Taxation in India: Everything an F&O Trader Should Know About Return Filing

Futures and Options (F&O) trading in India offers immense opportunities for traders. The Income Tax Act classifies F&O income as Non-Speculative Business Income and requires it to be mandatorily reported in the Income Tax Returns (ITR). Further, any F&O loss is allowed to be set off against other income and the excess loss can be carried forward to the subsequent year. Failure to comply with the provisions of the Act might lead to notices from the tax department.

Read this article to learn everything about the tax implications of F&O gains and losses.  

Why Gains or Losses from F&O Trades Must be Reported in ITR?

Many taxpayers engaged in F&O trading often overlook reporting their trading income in their tax returns. This is usually due to the lack of awareness, but failing to declare all sources of income can lead to penalties. The tax authorities now have detailed information regarding transactions on the stock market, so it is not difficult to detect discrepancies. 

Failure to report F&O gains or losses in the ITR might result in an Income Tax Notice from the authorities. On the other hand, reporting F&O trading losses has some useful tax advantages as they can be set off against other incomes or carried forward to the subsequent years. Maintaining proper and complete reporting not only keeps you in compliance but also allows you to optimize your tax position.

Income Head: Reporting of F&O Trading as Business Income

As per Section 43(5) of the Income Tax Act, income or loss from F&O is classified as non-speculative business income. Therefore, F&O gains and losses have to be reported as Normal Business Income under the head PGBP (Profits & Gains from Business and Profession).

Which ITR to File for Reporting F&O Income?

Given that F&O Income falls under the category of business income, people having F&O trades must report the profit/loss in ITR-3 (ITR form designated for people having PGBP Income) and if you are filing under the presumptive scheme then you can use ITR-4.  
When you file with ClearTax, there is no need to manually select the right ITR form as our software auto-selects the correct ITR form based on your income and other relevant information. 

Should F&O Traders Maintain Accounting Records?

Yes, F&O traders are mandatorily required to maintain books of accounts if:

• Income exceeds Rs 2.5 lakhs or 
• Turnover exceeds Rs 25 lakhs in any of the 3 preceding years or in the first year in case of a new business. 

Keeping your trading statements, expense receipts, profit & loss statements, and bank account statements will mostly suffice. 

Audit and Return Filing

Every person carrying any business will have to get his accounts audited if his turnover exceeds Rs.1 Crore in the previous year or Rs. 10 Crore if the cash receipts and payments do not exceed 5% of the total receipts or payments. Calculating trading turnover is important to determine the applicability of the Tax Audit. 

Important Note: You won't have to maintain any books of accounts or get them audited if you opt for the presumptive taxation scheme under Section 44AD.

How to Calculate F&O Turnover?

Turnover for F&O Trading = Absolute Profit

Absolute Turnover refers to the sum of positive and negative differences. 

Note: Please note that the calculation for options trading turnover has been updated as per the eighth edition of the guidance note dated 14/08/2022 (applicable from Assessment Year 2022-23). Previously, options trading turnover included "Absolute Profit + Premium on Sale of Options."

Example: Aditya buys 100 units of Futures @ Rs 200 and sells at Rs 210. Also buys 200 units of options @ Rs 300 and sells at Rs 290.

This is how his turnover would be determined:

Is Tax Audit Applicable for F&O Trading Under Section 44AB?

F&O traders commonly get confused about tax audit applicability. Let us break down the tax provisions. 
Section 44AB: Tax Audit: Let us see what this section talks about tax audit

Now that tax audit is dependent on another section, i.e. Section 44AD, let us take a look at the relevant portion.

Tax Audit Applicability for F&O traders

Tax audit applicability for F&O traders is discussed below based on their turnover. 

1. Trading Turnover up to Rs. 3 Cr 
   If the profit from F&O is less than 6% of the Trading Turnover and you've opted out of the presumptive taxation scheme in any of the immediate 5 previous years, and your total income exceeds the basic exemption limit, then Tax Audit will be applicable [Section 44AB(e)] 
   On the other hand, if the taxpayer has a profit equal to or greater than 6% of the Trading Turnover, then Tax Audit is not applicable. 
2. Trading Turnover between Rs. 3 Cr and Rs. 10 Cr 
   If the Trading Turnover falls within the range of Rs. 3 Cr and Rs. 10 Cr and the majority of transactions (more than 95%) are carried out digitally, then tax Audit is not required, regardless of whether there is a profit or loss. (Section 44AB). 
3. Trading Turnover of more than Rs. 10 Cr 
   Tax Audit is applicable irrespective of the profit or loss [Section 44AB(a)].

F&O Losses – Provisions Relating to Set-off and Carry Forward

If you have incurred losses from F&O trading, the main reason to file your Income Tax Return (ITR) is to set-off and carry forward those losses. You can set off F&O losses against other income (except salary income) in the same financial year. Any remaining losses can be carried forward for up to 8 years and adjusted against future income, which helps reduce your tax liability in those years.

However, it’s important to note that carried forward F&O losses can only be set off against non-speculative business income in the subsequent years.

Can Expenses be Claimed by F&O Trader?

Yes, you can deduct your business expenses from your F&O income. Ensure that you claim only those expenses which are directly and exclusively related to your business. These may include brokerage fees, broker's commission, subscriptions to trading-related journals, telephone bills, internet costs, consultant charges if you sought professional advice and were charged for it, or the salary of an individual you hired to assist with your business. All of these expenses are eligible for deduction.

It is important to maintain proper records of receipts and bills, and it is advisable to make payments though digital means instead of using cash.

Expenses exceeding Rs 10,000 in cash may not be eligible for deduction. In cases where an expense is both personal and business-related, claim a reasonable portion that can be attributed to the business.

Example

Aditya, employed at ABC Ltd, earned a salary of Rs 15 lakh in FY 2024-25. As an investor he opened an F&O trading account, paying Rs 5,000 in enrolment charges. Throughout the year, Aditya paid Rs 98,000 in brokerage fees and incurred Rs 36,000 in telephone expenses, of which 50% was related to his F&O trading activities. Additionally, the internet bill amounting to Rs 14,400 for the year, was essential for his research and market analysis.

Aditya incurred a loss of Rs 3 lakh from F&O trading, with a total turnover of Rs 30 lakh. Alongside his salary, Aditya earned Rs 80,000 in interest income and Rs 3.5 lakh from rental income during the year. 

Aditya's taxable income for FY 2024-25 will be computed as follows:

Expenses of F&O Business

Income (loss) from F&O

Total Taxable Income of Aditya 

Note:  Business Loss cannot be adjusted from the salary income

Due to the F&O loss, Aditya was able to reduce his total taxable income from Rs. 19,30,000 to Rs. 15,00,000, thereby decreasing his overall tax liability.

Should F&O Traders Opt for New Tax regime?

F&O traders have the option to pay taxes under the new tax regime outlined in Section 115BAC of the Income Tax Act. Should F&O traders opt for this new tax regime? It is important to consider the following key points under the new tax regime:

• The tax liability will be calculated based on the slab rates introduced in the new tax regime
• F&O Traders will not be allowed to claim deductions under Chapter VI-A like 80C, 80D etc.
• Traders engaged in business activities who opt for the old tax regime have an option to go back to the new regime only once in a lifetime. Form 10-IEA shall be filed for opting out of the new tax regime. 

Taxability of Other Investments

In addition to F&O trading, you may also carry out intra-day trading or long-term or short-term investment. However, it is important to note that the taxation rules for each of these activities differ:

• Intra-day trading: must be treated as a separate business (speculative business) from F&O and its income/(loss) should be computed separately.
• If you have a large volume and high frequency of short term trading in equity shares that may be treated as business income or capital gains. Choose a basis wisely and implement it consistently across financial years.
• If you are a long term equity investor or have fewer short-term equity shares, gains from these may be treated as capital gains.

Related Content: 
How to Show F&O Loss in Income Tax Return 
How Profits From Intraday Trading Are Taxed?