Profits from Futures and Options are not finalised at execution - taxation plays a similarly vital part. In India, F&O income has a different set of rules compared to equity investing, and its classification, forms of filing and triggers for audit are different. These rules apply to residents and NRIs. Understanding the mechanism of gains, losses, audits and deductions will ensure that traders meet compliance requirements, avoid penalties and comprehensibly cater to their post-trade obligations.
Key Takeaways
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F&O Income is characterised as non-speculative business income for residents and NRIs.
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Profits are subject to tax at individual slab rates and not capital gains rates.
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ITR-3 is obligatory in reporting F&O income.
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A tax audit is applied in cases where the turnover is above 10 crore rupees or the profits are less than 6% of turnover.
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:
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Futures are contracts that obligate you to buy or sell an asset at a set price on a future date.
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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.
Understanding F&O Taxation in India
Under Section 43(5) of the Income Tax Act, futures and options business is considered non-speculative business income. This means that profits and losses from derivatives have to be reported under the head Profits and Gains from Business or Profession while filing returns. All F&O profits go into addition to total income and are taxed as per slab rates applicable to residents and NRI. Importantly, even losses must be declared as reporting losses will allow set-off against other business income as well as carry-forward benefits under F&O taxation rules.
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
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Tax Rates
Your F&O trading profits are added to your total income and taxed as per the applicable income tax slab. Under the New Tax Regime (FY 25-26), the basic exemption is ₹4 lakh. For residents, income up to ₹7 lakh is tax-free due to the Section 87A rebate. From FY 2025-26, ₹12 lakh limit with ₹60,000 rebate applies.
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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.
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Can You Claim Expenses?
Yes. Since F&O is treated as business income, you can deduct expenses such as:
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Brokerage charges
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Internet bills
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Cost of trading software
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Advisory fees
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Depreciation on laptops or phones used for trading
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Rent or electricity (if you have a home office)
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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:
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Ledger
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Profit and Loss account
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Balance sheet
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Daily trade logs
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What About Audit Requirements?
You need to get your accounts audited by a Chartered Accountant if:
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Your F&O turnover exceeds ₹10 crore, or
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If you opt for presumptive taxation and turnover exceeds ₹3 crore
This audit must be completed by 30th September following the end of the financial year.
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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:
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Trade 1: ₹60,000 profit
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Trade 2: ₹40,000 loss
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Total turnover = ₹60,000 + ₹40,000 = ₹1,00,000
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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.
Which ITR to File For Reporting F&O Income?
Since the income derived from Futures & Options trading is considered business in the income tax laws of India, on the basis of turnover and method of taxation the appropriate ITR will be used by the taxpayers. Under F&O taxation, most of the individual traders and HUFs have to file their ITR-3 if they maintain regular books of accounts.
However, in case presumptive taxation under Section 44AD is preferred, and the turnover is less than or equal to ₹50 lakh, ITR-4 can be used. Turnover, profits, losses and costs should be disclosed accurately in order to prevent mistakes or scrutiny and future taxation issues.
Tax Treatment of F&O Trading Income for NRIs [
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Same Income Classification
Just like residents, F&O income for NRIs is considered non-speculative business income.
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Applicable Tax Rates
NRIs are taxed according to slab rates, and they enjoy the basic exemption limit (up to ₹4 lakh under the New Regime and ₹2.5 lakhs under the old regime). However, they are not eligible for the Section 87A rebate.
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Use of ITR Form
NRIs also have to file ITR-3 if they are involved in F&O trading.
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Audit Rules
NRIs are subject to the same audit requirements as residents based on turnover and profit.
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Repatriation of Profits
NRIs can repatriate profits earned through F&O trading after paying taxes. In most cases, they’ll need:
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Form 15CB from a Chartered Accountant
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Form 15CA filed online on the income tax portal
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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 it should be checked with your broker.
Can Small F&O Traders Opt for Presumptive Taxation?
Under Section 44AD, resident individuals (not NRIs) can declare non-speculative profits at 6% of turnover if all transactions are digital. If cash-based, the presumed profit rate is 8%.
Benefits:
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No need to maintain books of accounts
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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. Though 44AD is available, it is generally more scrutinised. That’s why, consulting a tax professional is crucial.
How are Losses From F&O Trades Handled?
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Setting Off Losses
Losses from F&O can be set off against any business income, but not against salary income.
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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.
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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
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Using the wrong ITR form (ITR-1 or ITR-2 instead of ITR-3)
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Not reporting losses, which prevents future set-off
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Ignoring audit requirements
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Missing advance tax deadlines
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Not maintaining a profit and loss statement
Example Cases to Understand F&O Taxation
Example 1: Resident Trader With ₹5 lakh Profit
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Turnover: ₹5 lakh
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No audit needed (profit > 6%)
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File ITR-3
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Tax at individual slab rates
Example 2: NRI Trader With ₹1.5 lakh Profit
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Basic exemption but no rebate u/s 87A
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Tax as per slab
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Forms 15CA/CB needed to repatriate
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ITR-3 filing necessary
Example 3: Resident Trader With ₹3 lakh Loss
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Can carry forward loss for 8 years
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Must file return on time
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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
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ITR-3 – For all F&O income
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Form 3CD/3CB – For audited accounts
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Form 15CA/15CB – For NRIs repatriating income
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Form 26AS – To check tax credits and TDS
Can an F&O trader Claim Business Expenses?
Yes, since F&O trading is a business activity, traders can consider eligible expenses as a deduction from taxable income. These include brokerage charges, exchange fees, internet &phone bills, trading software costs, advisory charges, depreciation on devices and home office expenses.
A few things to note:
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Expenses must be trade-related in nature.
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Correct bills and receipts should be kept.
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Cash expenses over ₹10,000 are usually disallowed.
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Expenses are claimable even in a loss-making year.
Is a Tax Audit Required for F&O Traders?
A tax audit as per Section 44AB is applicable for F&O traders based on the condition of turnover limits, profit declaration and mode of transactions. Under F&O Taxation, the turnover size and presumption taxation decisions play a role when deciding whether or not an audit will be mandatory.
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Cases When Tax Audit is Mandatory |
Cases When Tax Audit is Not Required |
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If turnover is exceeding the amount of ₹10 crores irrespective of the profit or loss, Section 44AB |
If turnover is less than ₹2 crores and profits equal to or more than 6% of the profit are declared under presumptive taxation |
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If the turnover ranges between ₹2 crore and ₹10 crore without opting for presumptive taxation, and their profits are below 6% |
When the turnover is between ₹2 and ₹10 crores, and 95% of the transactions are digital |
Understanding these thresholds helps traders stay compliant and avoid penalties.
Advance Tax Liability for F&O Traders
In case the total tax involved in the trading of F&O exceeds ₹10,000 in a financial year, advance tax must be paid in instalments as follows:
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Advance Tax Payable |
Due Date |
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15% of tax liability |
On or before 15th June |
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45% of tax liability |
On or before 15th September |
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75% of tax liability |
On or before 15th December |
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100% of tax liability |
On or before 15th March |
The traders who choose to take presumptive taxation must pay the entire advance tax in one go by 15th March. Failure attracts interest under Section 234B and 234C.
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.
