Taxation on F&O Trading in India: Rules & Examples 2026

Taxation on F&O Trading: A Comprehensive Guide for Traders

A lot of new traders think the income from Futures & Options (F&O) trading gets taxed just like regular stock investments. Not true. In India, the tax department treats F&O trading as a business, not as capital gains. This changes everything — from how you calculate your income and pay your taxes, to what paperwork you need to keep up with.

1. How Your F&O Income Gets Classified

F&O trades aren’t like holding shares for the long haul. You don’t actually take delivery of anything. Because of that, the tax department puts F&O profits under “Profits and Gains of Business or Profession” (PGBP). That means your F&O income counts as business income — not capital gains.

So, there’s no special tax rate like 10% or 15%. Whatever you make in F&O gets added to your total income (salary, rent, whatever else), and then it’s taxed according to your regular income tax slab.

2. What Expenses You Can Deduct

Since F&O is a business, you can deduct expenses you rack up while trading. This lowers the profit you’ll get taxed on. Here’s what you can typically claim:

Brokerage and exchange fees: Everything you pay to your Stock broker.
STT (Securities Transaction Tax): Unlike with capital gains, here you can claim STT as a business expense.
Internet bills, trading software, charting tools — all those monthly subscriptions.
Fees paid to SEBI-registered advisors.
Courses or books you bought to improve your trading game.

Just remember: keep the receipts. If you want to claim a deduction, you’ll need proof.

3. Getting Turnover Right

Turnover isn’t just the total value of contracts you traded. It’s a quirky calculation. The Institute of Chartered Accountants of India (ICAI) says:

Turnover = Absolute Profit + Absolute Loss

So, say you made ₹40,000 on one trade and lost ₹30,000 on another. Your net profit is ₹10,000, but your turnover is ₹70,000 (add both numbers, ignore the sign). Calculating this correctly matters because it decides if you need a tax audit.

4. Do You Need a Tax Audit?

If your trading turnover crosses ₹10 Crores in a year, a Chartered Accountant needs to audit your books. But there’s more:

If your turnover is under ₹2 Crores and you show profits less than 6% of turnover (or you report a loss), and your total income is above the exemption limit, you still need an audit.
If you use the so-called Presumptive Taxation Scheme (Section 44AD), you can just declare 6% of your turnover as profit and skip the audit, as long as you meet the rules.

5. Reporting and Dealing with Losses

If you lose money trading F&O, don’t hide it. Report it in your Income Tax Return (ITR). That way, you get two benefits:

Set-Off: You can set off F&O losses against other business income or rental income, but not against your salary.
Carry Forward: If you can’t set off the whole loss this year, carry it forward for up to eight years and adjust it against future business profits.

But don’t miss the ITR filing deadline (usually July 31st), or you’ll lose the right to carry forward your losses.

6. Which ITR Form Should You Use?

ITR-3: This is the go-to form for most F&O traders.
ITR-4: Use this if you’re choosing the Presumptive Taxation Scheme (Section 44AD).
ITR-1 and ITR-2: These won’t work for F&O income.

A Few More Things

Advance Tax: If your tax bill for the year is over ₹10,000, you need to pay advance tax in four installments — June, September, December, and March.
STT Rates: Keep an eye on the latest STT rates for F&O trades. They change sometimes, and they affect your costs.

7. The Easy Route: Presumptive Taxation

If your F&O turnover is under ₹2 Crores, you can make your life simpler with the Presumptive Taxation Scheme (Section 44AD). Here’s how it works: instead of keeping detailed books or getting an audit, you just declare a fixed percentage of your turnover as your profit. That’s it — less paperwork, less hassle.

In short, F&O taxes have their own rules and quirks. If you know how they work, you’ll save yourself a lot of trouble — and maybe some money, too.

The Rate: Since F&O trading is digital, you can declare 6% of your Turnover as your Net Profit and pay tax on that amount.
The Benefit: No need for a CA Audit. No need to maintain complex accounting ledgers.

⚠️ Important Condition (The 5-Year Rule):

If you opt for Section 44AD in any year, you must follow it for the next 5 consecutive years.

The Risk: If you declare profits under 44AD this year, but declare a loss (or profit less than 6%) in the 3rd year, you may be barred from using the scheme for the next 5 years and might require a mandatory Tax Audit in that year.

8. Intraday Equity vs. F&O: Know the Difference

Many traders mix these two, leading to errors in filing.

Feature	Intraday Equity (Cash)	F&O Trading
Classification	Speculative Business	Non-Speculative Business
Loss Set-off	Can ONLY be set off against Speculative Profits.	Can be set off against any Business Income or Rental Income (Not Salary).
Carry Forward	4 Years	8 Years

Key Takeaway: You cannot use your Intraday Equity losses to reduce your tax on F&O profits. They must be kept separate

9. The Advance Tax Calendar

Since F&O is considered a business, you cannot wait until July 31st to pay your entire tax liability. If your total tax liability for the year is ₹10,000 or more, you must pay Advance Tax to avoid interest penalties under Section 234B and 234C.

Deadline	Amount Payable
On or before June 15	15% of total estimated tax
On or before Sept 15	45% of total estimated tax
On or before Dec 15	75% of total estimated tax
On or before Mar 15	100% of total estimated tax

Tip: Review your P&L quarterly and deposit the approximate tax to stay compliant.

10. Tax Loss Harvesting in F&O

Just like in equity, you can plan your trades towards the end of March to manage your tax liability.

Scenario: If you have a huge realized profit of ₹10 Lakhs in March, and you are holding a position with an unrealized loss of ₹2 Lakhs.
Strategy: Some traders book the loss in the current financial year to reduce the Net Taxable Profit (Turnover) and re-enter the position in April (next FY). This legally defers the tax liability.

FAQs

1. Can I file ITR-1 if I have a salary and F&O income?

No. ITR-1 is for Salary, House Property, and Other Sources only. Once you have Business Income (F&O), you typically must file ITR-3.

2. Is F&O trading considered speculative?

Generally, no. Trading in derivatives on recognized stock exchanges is treated as Non-Speculative Business Income. Intraday cash equity trading, however, is treated as Speculative Business.

3. Do I need to pay tax if I made a loss?

You do not pay income tax on a loss. However, you should still file your ITR to report the loss so you can carry it forward to reduce taxes in future profitable years.

Disclaimer: Investments in securities market are subject to market risks, read all the related documents carefully before investing.