F&O & Intraday Trading: Capital Gains or Business Income? Is Tax Audit Required?

Summary: Futures & Options (F&O) and intraday trading profits are explained as business income rather than capital gains. Intraday trades are classified as speculative business income, while F&O transactions are classified as non-speculative business income, whereas delivery-based equity investments are taxed as capital gains. The article states that speculative losses can be set off only against speculative profits, while F&O losses can be adjusted against most income except salary, with carry-forward allowed only if the ITR is filed within the due date. Using an illustration, it explains that F&O and intraday profits are taxed at slab rates, while long-term capital gains on delivered shares receive the concessional 12.5% rate above the specified exemption threshold. It further states that tax audit under Section 63 of the Income-tax Act, 2025 primarily depends on turnover, which for F&O is based on absolute profits and losses (plus premium received on options sold), and outlines the applicable turnover thresholds. Taxpayers with business income are advised to file ITR-3, maintain books under Section 62, preserve broker records, comply with advance tax requirements under Section 408 where applicable, and note the transition from the Income-tax Act, 1961 to the Income-tax Act, 2025 from FY 2026-27 onward.

I made about INR 3 lakh trading Nifty options this year and some intraday stock trades. My friend files his as capital gains at 12.5%. Someone else told me I need a tax audit. I’m completely confused – which is it?” – a first-year derivatives trader from Pune

This is easily the most common confusion I see among new investors who’ve started trading actively. The short answer will surprise many people: profit from Futures & Options (F&O) and intraday trading is not a capital gain at all. It is treated as business income. Getting this wrong can mean a wrong ITR form, denied loss carry-forward, and notices later. Let’s clear it up.

Why F&O and intraday are “business,” not “capital gains”

Capital gains arise when you buy an asset, hold it, and sell it for a profit – shares, property, mutual funds and so on. Trading is different. When you buy and sell in the same session (intraday) or deal in derivatives where nothing is actually delivered to your demat account, the tax law treats you as running a trading activity, i.e. a business. Two buckets result:

This split matters because speculative (intraday) losses can only be set off against speculative profits, while F&O losses are non-speculative and can be set off against most other income (except salary). Both can be carried forward – intraday losses for 4 years, F&O losses for 8 years – but only if you file your ITR by the due date.

Let’s understand this with a practical example – 

Take Rohan, who in FY 2025-26 has: a salary of INR 12,00,000; F&O profit of INR 2,20,000; intraday (speculative) profit of INR 80,000; and long-term equity gains of INR 1,50,000 from shares he actually held. Here is how each is taxed:

So Rohan’s INR 3,00,000 of trading profit (F&O + intraday) is added to his salary and taxed at slab rates under the new regime (Section 202 of the Income-tax Act, 2025), while only the INR 1,50,000 from shares he genuinely held gets the concessional 12.5% capital-gains rate – and even there, the first INR 1,25,000 is exempt, so only INR 25,000 is taxed at 12.5% (about INR 3,125). His friend who declared F&O as capital gains was simply filing it wrong.

So do you need a tax audit?

This is where the panic usually comes from. Under Section 63 of the Income-tax Act, 2025 (the old Section 44AB), a tax audit for a trading business is triggered mainly by turnover – and for F&O, “turnover” is not your total contract value. It is the sum of your absolute profits and losses (plus premium received on options sold). For most small traders this figure is modest.

The practical rule of thumb for a full-time or part-time trader with no other complications:

Because virtually all broking transactions are digital, the effective audit threshold for most traders is INR 10 crore of turnover, not INR 1 crore. A trader with INR 3 lakh of profit on a few lakh of turnover almost never needs an audit. You do, however, need to maintain books of account under Section 62 and report the activity correctly in ITR-3.

What you must actually do

File ITR-3 (not ITR-1 or ITR-2), because you have business income. Keep your broker’s tax P&L statement and contract notes. If you had a trading loss this year, file on time so you can carry it forward. And remember: since this is business income, if your total tax liability for the year is INR 10,000 or more, advance tax applies under Section 408 – pay it in instalments to avoid interest under Sections 424 and 425.

A note on the transition: the return you file this season – for FY 2025-26 (AY 2026-27) – is governed by the Income-tax Act, 1961, using the sections cited above. From FY 2026-27 onward, the new Income-tax Act, 2025 takes over and these provisions are renumbered – for example, Section 44AB becomes Section 63 and Section 44AD becomes Section 58 – but the same principles carry forward.

The Bottom line: F&O and intraday profits are business income taxed at your slab rate – not the friendly 12.5% capital-gains rate. But the flip side is good news: an audit is unlikely unless your turnover is very large, and your losses are usable if you file on time.

This article is for general information based on the law as it stands for FY 2025-26 (AY 2026-27) under the Income-tax Act, 1961. It is not a substitute for advice on your specific facts.

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About the Author: Sonia Dawar is a practising Chartered Accountant and the founder of Dawar & Co., where she helps investors, salaried professionals and business owners cut through tax complexity with plain, practical advice. She writes to answer the real questions clients bring to her desk. Have a question of your own? Reach her at sonia@dawarandco.com.