Summary: Profits from exchange-traded futures and options (F&O) are generally taxable as non-speculative business income under the head “Profits and Gains of Business or Profession”. Eligible derivative transactions conducted electronically through a recognised stock exchange are excluded from the definition of a speculative transaction under section 43(5)(d) of the Income-tax Act, 1961 and, from 1 April 2026, under sections 66(31) and 66(33) of the Income-tax Act, 2025. Taxable F&O income is computed after deducting eligible business expenses incurred wholly and exclusively for the trading activity, with the resulting amount taxed at normal applicable rates rather than special capital-gains rates. F&O losses are treated as non-speculative business losses and may generally be set off against income under other heads, except salary income, subject to applicable restrictions. Unadjusted losses may be carried forward for eight tax years and set off against business or professional profits, provided the return is filed within the prescribed due date. For tax audit and compliance purposes, F&O turnover is determined according to the ICAI Guidance Note on Tax Audit, with the aggregate of favourable and unfavourable differences, relevant option-sale premium and reverse-trade differences taken into account as applicable. Open positions at year-end and delivery-based settlements have separate turnover considerations. Individuals and HUFs generally disclose F&O income in ITR-3, with the supplied material also referring to ITR-4 for applicable loss carry-forward reporting.
Taxation of profits from exchange-traded futures and options (F&O)
Profits from exchange-traded futures and options (F&O) are generally taxable under the head “Profits and Gains of Business or Profession” as non-speculative business income. Eligible derivative transactions conducted electronically through a recognised stock exchange are specifically excluded from the definition of a speculative transaction. This treatment is contained in section 43(5)(d) of the Income-tax Act, 1961 and, from 1 April 2026, in sections 66(31) and 66(33) of the Income-tax Act, 2025.
The taxable amount is the net F&O profit after deducting eligible business expenses, such as brokerage, exchange charges, internet expenses, professional fees and other expenditure incurred wholly and exclusively for the trading activity. The resulting profit is added to the taxpayer’s other income and taxed at the normal rates applicable to that taxpayer, together with surcharge and cess, wherever applicable. It is not taxed at the special rates applicable to short-term or long-term capital gains.
For instance, if the gross F&O profit is Rs. 5 lakh and eligible trading expenses are Rs. 75,000, the net business income taxable would ordinarily be Rs. 4.25 lakh. Individuals and HUFs generally disclose such income in ITR-3.
Treatment of F&O losses under the Income-tax Act
F&O losses arising from eligible transactions on a recognised stock exchange are treated as non-speculative business losses, rather than speculative or capital losses. Accordingly:
- Set-off during the same year:The loss may generally be adjusted against income under any other head, including capital gains, house-property income or income from other sources. However, it cannot be set off against salary income. Specific restrictions may also apply to certain specially taxed incomes.
- Carry-forward of unadjusted loss:Any balance remaining after the current-year set-off may be carried forward for eight tax years. In subsequent years, it can be adjusted only against profits from a business or profession, which need not necessarily be the same F&O activity.
- Timely return is essential:To carry the loss forward, the taxpayer must disclose it in the applicable income-tax return i.e. generally ITR-3/ ITR-4 for an individual or HUF and file the return within the prescribed due date. A belated return ordinarily does not preserve the right to carry forward the business loss.
For example, if an individual has an F&O loss of Rs. 3 lakh, interest income of Rs. 1 lakh and salary income of Rs. 10 lakh, the loss may be set off against the Rs. 1 lakh interest income but not against the salary. The remaining Rs. 2 lakh may be carried forward for up to eight years, provided the return is filed on time.
For income-tax purposes, how is “turnover” calculated for F&O transactions
For tax audit and compliance purposes, the methodology for computing F&O turnover is guided by the ICAI Guidance Note on Tax Audit. While F&O transactions are treated as non-speculative business transactions under the Income-tax Act, turnover assumes significance for determining tax audit applicability and certain other compliance requirements.
Computation:
- Aggregate of favourable and unfavourable differences: The absolute value of all profits and losses arising from squared-off derivative transactions should be aggregated while determining turnover.
- Premium on sale of options: Premium received on the sale of options should be included in turnover. However, if such premium has already been considered while computing profit or loss, it should not be included again, so as to avoid double counting.
- Reverse trades: Any gains or losses arising from reverse or offsetting trades should also be considered while calculating turnover.
- Open positions at year-end: In cases where derivative positions remain open as at the end of the financial year, the turnover attributable to such contracts is generally recognised in the year in which the positions are ultimately squared off or settled.
- Delivery-based settlement: Where a derivative contract culminates in delivery, the difference between the trade price and the settlement price is generally considered for turnover purposes. Additionally, where the underlying asset is held as stock-in-trade, the sale value of such asset may also form part of the business turnover of the transferor, as applicable.
