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Every F&O trade you made this financial year is already visible to the Income Tax Department. Through your Annual Information Statement, the IT department receives transaction data directly from the stock exchanges. Whether you made a profit of ₹5 lakh or lost ₹3 lakh, your activity is on record.

What catches most traders off guard is that F&O income is taxed very differently from regular stock market gains. There is no 15% short-term rate or 10% long-term rate here. F&O trading is treated as business income, and it comes with its own ITR form, its own audit rules, and its own loss treatment.

From April 1, 2026, two major changes have come into effect: the new Income Tax Act 2025 replaces the Income Tax Act 1961, and the Securities Transaction Tax on F&O has been hiked significantly. This guide covers the full picture for FY 2025-26 and FY 2026-27, with all numbers verified.

What the Law Says About F&O Income

Under Section 43(5) of the Income Tax Act 1961, income from futures and options trading is classified as non-speculative business income. With the Income Tax Act 2025 coming into force from April 1, 2026, this classification continues under Section 66 of the new Act.

The core rule does not change under the new law. F&O profits are taxed as business income under the head ‘Profits and Gains from Business or Profession’ (PGBP) at your applicable income tax slab rate.

F&O is specifically kept out of the speculative category because derivatives contracts involve settlement based on actual underlying asset prices and serve hedging purposes. Intraday equity trading is speculative. F&O is not.

This classification applies whether you are a salaried employee who traded Nifty options twice this year or someone who actively trades stock futures every day.

Tax Rate on F&O Income

There is no flat rate for F&O profits. Your net F&O income is added to all other income and taxed at the applicable slab rate.

Income Type

Tax Treatment

Rate

Listed equity held under 1 year

Short-term capital gain

20%

Listed equity held over 1 year

Long-term capital gain

12.5% above ₹1.25 lakh

F&O trading income

Non-speculative business income

As per your income tax slab

Example of how F&O profit is taxed:

Income Head

Amount

Salary after standard deduction

₹9,00,000

Net F&O profit after expenses

₹1,50,000

Total taxable income

₹10,50,000

The ₹150,000 F&O income is not taxed separately. It is combined with salary and taxed at the applicable slab.

Section 87A Rebate: Will You Pay Zero Tax?

Under the new tax regime for FY 2025-26 (AY 2026-27), the Section 87A rebate is available for individuals whose taxable income does not exceed ₹12 lakh. The rebate amount is ₹60,000, which effectively brings tax liability to zero for eligible taxpayers.

Under the old tax regime, the rebate applies up to ₹5 lakh taxable income, with a rebate of ₹12,500.

What this means for F&O traders: If your salary is ₹10 lakh and you made an F&O profit of ₹1.5 lakh, your total income of ₹11.5 lakh falls within ₹12 lakh, and you may pay zero tax under the new regime. But if the same profit pushes your income to ₹12.1 lakh, the rebate is lost entirely, and you pay tax on the full amount.

Traders above ₹50 lakh in total income also face a surcharge on top of the applicable slab rate.

Expenses You Can Deduct

Because F&O income is treated as business income, you can deduct legitimate costs incurred for trading from your gross profits. This reduces your net taxable F&O income.

Expenses that are deductible:

  • Brokerage and transaction charges
  • GST paid on brokerage
  • STT paid on F&O trades (deductible as a business expense when trading income is offered as business income)
  • Internet charges used for trading
  • Fees for trading platforms, data feeds, and research subscriptions
  • CA or tax consultant fees for ITR filing
  • Depreciation on a laptop, computer, or trading equipment
  • Rent and electricity for a dedicated trading space

Verified source note on STT deductibility: ClearTax and Tax2 Both Win, and the STT confirm that STT is deductible as a business expense when income from trading is offered as business income. This corrects an error in an earlier version of this article.

STT Hike From April 1, 2026: What Has Changed

Finance Minister Nirmala Sitharaman announced revised STT rates in the Budget 2026. These came into effect on April 1, 2026.

Transaction

Old STT Rate

New STT Rate

Sale of futures

0.02% of contract value

0.05% of contract value

Sale of options premium

0.10% of the premium

0.15% of premium

Exercise of options

0.125%

0.15%

Practical impact: On a ₹10 lakh futures contract, the STT cost increases from ₹200 to ₹500 per transaction, a jump of ₹300. For an active futures trader executing ₹1 crore of notional value daily across 250 trading days, the annual STT burden goes up by approximately ₹75,000.

This hike applies to the derivatives segment only. STT on equity delivery and intraday cash market trades is unchanged.

How to Calculate F&O Turnover

F&O turnover is not calculated the same way a business calculates its revenue. The method used is the absolute value method: you add up the profit or loss on each trade as a positive number, regardless of whether it was a gain or a loss.

For futures:
Turnover equals the sum of absolute profit or loss on each futures contract.

Example:

  • Nifty Futures: Profit ₹25,000 = add ₹25,000
  • Bank Nifty Futures: Loss ₹18,000 = add ₹18,000
  • Stock Futures: Loss ₹7,000 = add ₹7,000
  • Total Futures Turnover = ₹50,000

For options:
As per the ICAI 8th Edition Guidance Note (August 2022), turnover equals the absolute profit or loss per trade. The earlier method of separately adding option premiums received on sale has been revised.

Your broker’s tax P&L report provides the data needed for this calculation.

Full Worked Example: Salaried Trader With F&O Loss

This is the situation most salaried F&O traders face. Rohit earns a ₹12 lakh salary and had a net F&O loss in FY 2024-25.

Item

Amount

Gross salary

₹1,200,000

Standard deduction

₹75,000

Net salary income

₹1,125,000

F&O gross loss

₹220,000

Deductible expenses (brokerage, STT, internet, CA fees)

₹30,000

Net F&O business loss

₹250,000

Short-term capital gains from equity

₹80,000

Rental income

₹120,000

Applying the set-off rules:

Rohit’s F&O loss of ₹250,000 cannot be set off against his salary income. This is a firm rule under the Income Tax Act. Non-speculative business losses cannot reduce salary income in the same year.

However, his F&O loss can be set off against STCG and rental income:

Set-off

Amount

F&O loss

₹250,000

Set off against STCG (₹80,000)

₹80,000 absorbed

Set off against rental income (₹120,000)

₹120,000 absorbed

Remaining F&O loss carried forward

₹50,000

Rohit’s final taxable income:

Item

Amount

Net salary

₹1,125,000

STCG after set-off

₹0

Rental income after set-off

₹0

Total taxable income

₹1,125,000

F&O loss carried forward to next year

₹50,000

By filing correctly, Rohit reduced his taxable income from ₹13,25,000 to ₹11,25,000, saving approximately ₹60,000 in tax at the 30% slab. This benefit is entirely lost if he does not file ITR-3 on time.

Which ITR Form to Use

All F&O traders must use ITR-3, without exception.

Form

Who It Is For

F&O Traders?

ITR-1 (Sahaj)

Simple salaried individuals

Not applicable

ITR-2

Individuals with capital gains

Not applicable

ITR-3

Individuals with business or professional income

Yes, it’s mandatory

ITR-4 (Sugam)

Presumptive taxation cases

Only if opting for Section 44AD and declaring profits

Business code for F&O in ITR-3: Use code 09028 (retail sale of other products n.e.c.). The Income Tax Department introduced specific trading codes from AY 2025-26. Check your ITR filing software for the most current code applicable to F&O and share trading before filing.

Documents required before filing:

  • Full-year trade statement and P&L report from your broker
  • Contract notes for significant trades
  • Bank statements for the trading account
  • Form 16 and salary slips
  • Expense invoices (brokerage statements, CA receipts)
  • Balance sheet and P&L account (required if audit applies)

When Is a Tax Audit Mandatory?

Since all F&O trades on exchanges are executed digitally, the 95% digital transaction condition is met by virtually every F&O trader. This means the effective audit threshold for most traders is ₹10 crore, not ₹1 crore.

Situation

Audit Required?

Turnover below ₹10 crore, profit at or above 6%, 95% digital transactions

No

Turnover below ₹10 crore, profit below 6% or loss, total income above ₹2.5 lakh

Yes

Turnover above ₹10 crore

Yes, in all cases

The hidden trigger: If you made a net F&O loss this year and your salary puts your total income above ₹2.5 lakh, you are required to get a tax audit done. A loss year is more likely to trigger an audit than a profitable year.

Penalty for missing a mandatory audit: 0.5% of turnover, up to ₹1.5 lakh, under Section 271B.

Books of Accounts: What You Must Maintain

You must maintain books of accounts if:

  • Your income from F&O exceeded ₹2.5 lakh in any of the three preceding financial years
  • Your total F&O turnover exceeded ₹25 lakh in any of the three preceding financial years

Minimum records required:

  • Contract notes and trade statements from your broker
  • Bank account statements for the trading period
  • Cash book and ledger
  • Profit and loss account for the year
  • Balance sheet as of March 31

A downloaded P&L report from your broker is useful, but it is not a substitute for maintained books. If your case goes to audit, the auditor will need organised records.

New Tax Regime vs Old Tax Regime for F&O Traders

F&O traders can choose either regime. The choice has real consequences.

Factor

New Tax Regime

Old Tax Regime

Slab rates

Lower rates (up to 30%)

Higher rates (up to 30%)

Deductions (80C, HRA, home loan)

Not available

Available

Standard deduction

₹75,000

₹50,000

Section 87A rebate limit

₹12 lakh

₹5 lakh

Carry forward of F&O losses

Allowed

Allowed

Best suited for

Traders with few deductions

Traders with large deductions

Traders with significant deductions (home loan interest, 80C investments, and HRA) should calculate tax under both regimes before deciding. For traders without these deductions, the new regime typically results in lower tax because of the higher rebate threshold and lower slab rates.

Important: Traders with business income who want to opt out of the new regime (which is the default) must file Form 10-IEA on or before the due date under Section 139(1).

Set-Off and Carry Forward Rules

What F&O losses can be set off against in the same year:

  • Short-term capital gains: Yes
  • Long-term capital gains: Yes
  • House property income: Yes
  • Other non-speculative business income: Yes
  • Salary income: No
  • Speculative business income (intraday equity): No

Carry forward rules:

  • Unabsorbed F&O losses can be carried forward for up to 8 assessment years
  • In future years, carried-forward F&O losses can only be set off against non-speculative business profits
  • Carry forward is valid only if ITR-3 is filed on or before the due date under Section 139(1). A belated return forfeits this right entirely.

Advance Tax for F&O Traders

If your total estimated tax liability for the year exceeds ₹10,000, advance tax must be paid in four instalments.

Instalment

Due Date

Cumulative Percentage Required

1st

15th June

15%

2nd

15th September

45%

3rd

15th December

75%

4th

15th March

100%

Your employer deducts TDS from your salary. That TDS covers salary income only. F&O income has no TDS mechanism. You are responsible for estimating your F&O profits during the year and paying advance tax on them in the above instalments. Missing these payments attracts interest under Sections 234B and 234C.

Presumptive Taxation Under Section 44AD

If your F&O turnover is below ₹2 crore in the financial year, you can declare income under Section 44AD.

Under this scheme, you declare a minimum of 6% of your turnover as profit for fully digital transactions. No detailed books of accounts or audit are required.

This works if your actual profits are close to 6% of turnover. It does not work if you have a net loss, because you would be paying tax on an artificial profit. It is also not available to NRIs.

If you opt out of Section 44AD in any year, Section 44AD(4) prevents you from opting back in for five years. Decide carefully.

ITR Filing Due Dates

Category

Due Date

Non-audit cases

31st July of the assessment year

Audit cases

31st October of the assessment year

Missing these deadlines means:

  • Loss of the right to carry forward F&O losses
  • Interest under Sections 234A, 234B, and 234C
  • Potential scrutiny for a mismatch between AIS data and filed return

Common Mistakes F&O Traders Make

Filing ITR-1 or ITR-2 despite F&O activity
One trade is enough to disqualify you from ITR-1 and ITR-2. The IT department has been issuing notices specifically for this error in recent years.

Assuming a loss year needs no audit
A net loss means your profit percentage is 0%, well below the 6% threshold. If your salary takes your total income above ₹2.5 lakh, you need an audit.

Not reporting F&O at all
AIS records every transaction. A mismatch between your AIS and your filed ITR can trigger an automated scrutiny notice.

Paying all taxes at filing time
Tax paid only at the time of ITR filing attracts interest under Sections 234B and 234C for non-payment of advance tax during the year.

Using the old options turnover method
Adding the premium received on options sales separately (the pre-August 2022 method) inflates turnover. The correct approach, as per the ICAI 8th Edition Guidance Note, uses only absolute profit or loss per trade.

Conclusion

F&O taxation is not complicated once you know what applies to you. The core facts are clear. F&O is non-speculative business income under Section 66 of the Income Tax Act 2025. It is taxed at slab rates. It must be reported in ITR-3. Turnover is the absolute sum of all profits and losses. An audit is required if profits fall below 6% of turnover and your total income crosses ₹2.5 lakh. Losses can be carried forward for 8 years, but only if you file on time.

From FY 2026-27, the STT hike on futures and options adds to your trading costs. Since STT is a deductible business expense for F&O traders, maintaining proper records of what you paid will reduce your net taxable income.

If your case involves both salary and F&O losses, or if your turnover triggers an audit, a CA who handles trader returns will help you claim every deduction and avoid the compliance issues that come from filing incorrectly.

Frequently Asked Questions

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F&O income is non-speculative business income under Section 43(5) of the Income Tax Act 1961 and Section 66 of the Income Tax Act 2025. It is taxed at slab rates, not at capital gains rates.

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All F&O traders must use ITR-3. ITR-1 and ITR-2 cannot be used if you have any F&O income or loss during the year, even from a single trade.

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No. Non-speculative business losses cannot be set off against salary income. They can be set off against capital gains, house property income, or other business income in the same year. Unabsorbed losses carry forward for up to 8 years.

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Traders without large deductions generally benefit from the new regime because of lower slab rates and the higher ₹12 lakh Section 87A rebate. Traders with home loans, 80C investments, or HRA should calculate their tax under both regimes before deciding.

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Non-audit cases must be filed by July 31 of the assessment year. Audit cases have until October 31. Missing these dates forfeits the right to carry forward F&O losses.