Did you know that earning a profit in Futures and Options (F&O) trading is only half the job? The other half is understanding how that income is taxed, and getting it wrong can cost you in penalties, missed deductions, or even audit notices.
Whether you’re an active trader or just starting out, it’s essential to know that F&O trading income in India is not treated like regular stock investments. The tax rules are different, especially for residents and Non-Resident Indians (NRIs). This guide explains everything in simple language, how the income is classified, what forms to file, when audits are triggered, and how to deal with losses, so you can focus on trading while staying tax-compliant.
What is F&O trading and how does it work?
F&O are part of derivative trading in the stock market:
- Futures are contracts that obligate you to buy or sell an asset at a set price on a future date.
- Options give you the right, but not the obligation, to buy or sell an asset at a specific price within a certain period.
These contracts are traded on recognised stock exchanges in India, such as NSE and BSE.
How is F&O income classified under Indian tax law?
F&O income is treated as non-speculative business income. This is different from speculative income like intraday equity trading. Since these trades are executed on registered exchanges and involve proper settlement, they are not considered speculative.
This means any profit or loss from F&O must be reported as business income while filing your Income Tax Return (ITR).
Tax treatment of F&O trading income for Indian residents
1. Tax rates
Your F&O trading profits are added to your total income and taxed as per the applicable income tax slab. If your total income is within ₹2.5 lakh (for individuals below 60), you won’t pay any tax. Above that, rates increase in slabs, 5%, 10%, 20%, and 30%.
2. Applicable ITR form
If you earn income from F&O trading, you must use ITR-3. This form is meant for individuals and Hindu Undivided Families (HUFs) who have income from business or profession.
3. Can you claim expenses?
Yes. Since F&O is treated as business income, you can deduct expenses such as:
- Brokerage charges
- Internet bills
- Cost of trading software
- Advisory fees
- Depreciation on laptops or phones used for trading
- Rent or electricity (if you have a home office)
4. Do you need to maintain books of accounts?
If your income from F&O trading is substantial, it’s recommended (and in some cases mandatory) to maintain books of accounts. This includes:
- Ledger
- Profit and Loss account
- Balance sheet
- Daily trade logs
5. What about audit requirements?
You need to get your accounts audited by a Chartered Accountant if:
- Your F&O turnover exceeds ₹10 crore, or
- Your declared profit is less than 6% of turnover and your income is above the exemption limit
This audit must be completed by 30th September following the end of the financial year.
6. Turnover calculation in F&O
F&O turnover is not the total value of contracts, but the sum of absolute profits and losses. For example:
- Trade 1: ₹60,000 profit
- Trade 2: ₹40,000 loss
- Total turnover = ₹60,000 + ₹40,000 = ₹1,00,000
7. Advance tax liability
If your total tax payable in a year exceeds ₹10,000, you must pay it in advance, in four instalments, June, September, December, and March. Missing these can attract interest under sections 234B and 234C.
Tax treatment of F&O trading income for NRIs
1. Same income classification
Just like residents, F&O income for NRIs is considered non-speculative business income.
2. Applicable tax rates
NRIs are taxed according to slab rates. However, they do not get the benefit of the basic exemption limit unless the income is only from long-term capital gains or interest.
3. Use of ITR form
NRIs also have to file ITR-3 if they are involved in F&O trading.
4. Audit rules
NRIs are subject to the same audit requirements as residents based on turnover and profit.
5. Repatriation of profits
NRIs can repatriate profits earned through F&O trading after paying taxes. In most cases, they’ll need:
- Form 15CB from a Chartered Accountant
- Form 15CA filed online on the income tax portal
6. TDS on NRI accounts
Some brokers may deduct Tax Deducted at Source (TDS) on profits or credits in NRI accounts. This is not always required for F&O trades but should be checked with your broker.
Can small F&O traders opt for presumptive taxation?
Under Section 44AD, resident individuals (not NRIs) can declare profits at 6% of turnover if all transactions are digital. If cash-based, the presumed profit rate is 8%.
Benefits:
- No need to maintain books of accounts
- No audit required
However, if you declare a lower profit than 6% or 8%, you’ll need to maintain books and might have to get them audited.
Also, once you opt out of this scheme after using it, you can’t opt in again for 5 years.
How are losses from F&O trades handled?
1. Setting off losses
Losses from F&O can be set off against any business income, but not against salary income.
2. Carrying forward losses
Unadjusted losses can be carried forward for 8 financial years. They can be used to set off future business income, including F&O gains.
3. Important condition
To carry forward the loss, you must file your ITR before the due date, usually 31st July (or 31st October if audit is required).
Common mistakes traders make when filing F&O tax returns
- Using the wrong ITR form (ITR-1 or ITR-2 instead of ITR-3)
- Not reporting losses, which prevents future set-off
- Ignoring audit requirements
- Missing advance tax deadlines
- Not maintaining a profit and loss statement
Example cases to understand F&O taxation
Example 1: Resident trader with ₹5 lakh profit
- Turnover: ₹5 lakh
- No audit needed (profit > 6%)
- File ITR-3
- Tax at individual slab rates
Example 2: NRI trader with ₹1.5 lakh profit
- No basic exemption
- Tax as per slab
- Forms 15CA/CB needed to repatriate
- ITR-3 filing necessary
Example 3: Resident trader with ₹3 lakh loss
- Can carry forward loss for 8 years
- Must file return on time
- Can adjust against future F&O profits
Does share price matter for tax on F&O?
No. Tax is not based on the share price at the time of trade. It’s based on the net profit or loss from F&O contracts. Your profit and loss statement is what determines your tax liability.
Key forms and documents required
- ITR-3 – For all F&O income
- Form 3CD/3CB – For audited accounts
- Form 15CA/15CB – For NRIs repatriating income
- Form 26AS – To check tax credits and TDS
Conclusion
F&O trading can be a smart way to grow your money, but it comes with specific tax rules that every trader, resident or NRI, must understand. Since this income is treated as non-speculative business income, it requires accurate reporting, the correct ITR form, and, in some cases, a tax audit.
Staying compliant not only helps you avoid penalties but also ensures you can claim deductions and carry forward losses when needed. Whether you’re a frequent trader or just testing the waters, it’s always worth maintaining proper records and seeking advice from a tax professional if things get complex.
With the right knowledge and preparation, handling taxes on your F&O trades doesn’t have to be stressful, it can just be part of a well-managed trading strategy.
