Tax Filing For Security Traders - Future And Options

Under the Income Tax Act, profits or losses from F&O transactions are treated as business income under “Profits and Gains of Business or Profession.” Therefore, traders must report all F&O transactions in their income tax return (ITR), regardless of whether they make a profit or loss. Reporting these transactions allows traders to set off F&O losses against any income except salary and carry forward such losses for up to 8 assessment years to adjust against future business income. Failure to report F&O income or losses may result in an income tax notice from the tax department. 

Turnover Calculation for F&O Trading

Turnover calculation is crucial to determine whether a tax audit under Section 44AB applies. In F&O trading, turnover is calculated as the absolute sum of profit and loss on each contract (per scrip) plus the sell value of option contracts.

If the total turnover exceeds Rs. 10 crore, a tax audit becomes mandatory.

1. For businesses requiring audit:

• ITR due date: 31st October 2026 (unless extended by the government)
• Tax Audit Report (Form 3CA/3CB) due date: 30th September 2026

2. Non-compliance can attract penalties:

• Failure to maintain books of accounts: Penalty up to Rs. 25,000
• Failure to get tax audit done: 0.5% of turnover or Rs. 1.5 lakh, whichever is lower

Proper turnover calculation and timely compliance help avoid notices and penalties.

Example On Computation Of Turnover In F&O

In the below example, you will observe the trader has done some options trading in the NIFTY Index expiring on 22nd April

This income is taxable under the head business and profession. Now the question is how to declare the turnover. He has made Profits in some trades and Losses in some trades. Turnover is computed based on absolute profits at each trade level. Income has to be declared in the Profit and Loss account in the below manner.

*Here purchase cost is computed as the difference between Net profits and Turnover from F&O

How to Compute Income from F&O Trades?

Any profit or loss incurred from trading in futures and options is considered Business Income and is shown under the head “Income from business or profession” in the ITR. Income from F&O is not a speculative business income. It is not necessary to open a separate company for dealing in F&O trades. Any individual can deal in F&O trades. Many salaried individuals and retired senior citizens often deal in F&O trades.

Example On Computation Of Income

Let’s suppose Rahul is dealing in F&O. For the FY 2025-26, he incurred a loss from trading of Rs 2 lakhs. He incurred the following expenses related to trading: Brokerage charges 0.02% for each F&O trade and paid a total of Rs 73,000, Telephone expenses Rs 12,000, and Internet Rs 15,000.

He also has Interest income from bank Rs 3,50,000.

1. Calculation of Income from F&O

So even if Rahul has incurred a loss from trading in F&O, he must disclose it in his ITR as such loss can be set off against his interest income and will reduce his total taxable income.

If you’re trader and want to file your taxes, visit our page on tax filing for traders.

How To Claim Expenses

While calculating income from F&O trading, you can claim deductions for expenses incurred to earn this income. These may include rent for the workspace, internet and mobile charges, broker’s commission, demat account charges, depreciation on a laptop, and professional or consultancy fees.

However, you must keep proper bills and receipts for all such expenses. Also, any expense exceeding Rs. 10,000 in a single day to a single person must not be paid in cash. Otherwise, it will not be allowed as a deduction while computing taxable income.

F&O, Intraday and Capital Gains transactions must be reported in your Income Tax Return (ITR) even if they result in a loss. Many taxpayers skip reporting losses because no tax is payable, but reporting them is mandatory. If these transactions are not declared, the Income Tax Department may issue a notice since brokers report trading data through SFT filings.

Reporting losses also has important tax benefits. Losses from F&O trading can be set off against other incomes such as interest, dividend, or rental income (except salary). For example, if you have Rs. 8 lakh rental income and Rs. 2 lakh F&O loss, your taxable income reduces to Rs. 6 lakh.

If the loss cannot be fully adjusted in the same year, it can be carried forward for up to 8 years and set off against future business income. These carried forward losses are reported in Schedule CFL of the ITR.

When To Maintain Books Of Accounts?

Books of account must be maintained in the following cases:

• For existing business, where the income is more than Rs 2.5 lakh in any of the last three years and for new business, the estimated income is more than Rs 2.5 lakh.
• For professional, total sales, turnover or gross receipts are more than Rs 25 lakhs in any one of the preceding 3 years and for newly started professionals estimated income is more than Rs 25 lakh.
• Opt out of presumptive taxation scheme and income exceeds the basic exemption limit.
• Tax audit is applicable under section 44AB.

In case you are following a presumptive income scheme and declaring profits u/s 44AD, then you are not required to maintain books of account. However, audit is applicable if you want to declare profits lesser then the presumptive scheme. 

Audit Of Books Of Account

An audit is mandatory in the following case:

• If you trade in F&O, your business's turnover exceeds Rs 10 crores.
• Business turnover/ sales/ gross receipts exceeding Rs 1 crore are also subject to audit when more than 5% of the transactions are cash payments and receipts.
• For professionals, gross receipts exceeding Rs 50 lakh are subject to audit.
• When you declare profits less than 6% or 8% of turnover, your total income exceeds the basic exemption limit (i.e., Rs 2,50,000 in the old regime and Rs 3,00,000 in the new regime), and you are eligible for the presumptive taxation scheme under sections 44AD and 44ADA.

Which ITR is Applicable for Security Traders?

ITR 3 is applicable for Business Income. Even if you have a salary income, income from house property or income from any other sources, you will be able to disclose the income along with the F&O income in the ITR 3. In case you are following a presumptive income scheme then you will be required to file ITR 4. 

Documents Required to File ITR for Traders

• Form 16, if any
• Form 26AS tax credit statement
• Aadhar card
• Bank statement when interest received is above Rs. 10,000
• Trading account statement from the broker
• AIS - Annual Information Statement
• TIS - Tax Information Summary
• Capital gains or Tax P&L statement from your brokerage firm
• Bills for any expenses incurred