F&O Trading Taxation in India: What Every Trader Must Know in 2025!

Futures & Options (F&O) trading has become one of the most popular ways to participate in the Indian stock markets. However, the taxation aspect is often misunderstood by retail traders, leading to confusion, incorrect filings, and missed tax-saving opportunities. This comprehensive guide addresses all critical aspects of F&O taxation in India, with practical examples and compliance tips for the 2025 assessment year.

Table of Contents

1. What is the Nature of F&O Income?
2. Applicable Tax Rates on F&O Profits
3. Which ITR Form to Use for F&O Income?
4. How to Calculate F&O Turnover
5. When is Tax Audit Required for F&O Traders?
6. Presumptive Taxation Scheme for Small Traders
7. Claiming Expenses Against F&O Income
8. Set-off and Carry Forward of F&O Losses
9. Comparison with Intraday and Delivery-Based Trading
10. Detailed Examples for Better Understanding
11. FAQs on F&O Taxation

1. What is the Nature of F&O Income?

F&O income is treated as non-speculative business income under Section 43(5) of the Income Tax Act, provided the trades are executed through a recognized stock exchange.

This applies even if:

• You are an individual with a salaried job.
• You do not trade regularly.
• You incur losses.

2. Applicable Tax Rates on F&O Profits

Since F&O income is considered business income, it is taxed at individual slab rates:

3. Which ITR Form to Use for F&O Income?

You must file ITR-3 if you have F&O income, whether profit or loss. This form is required for individuals with business or professional income.

You can also use ITR-4 if you opt for presumptive taxation under Section 44AD (see Section 6).

4. How to Calculate F&O Turnover

Turnover is a critical metric for deciding audit applicability. It is NOT the total contract value. As per ICAI guidelines:

Turnover = Absolute Profit/Loss + Premium Received on Options Sold

Example:

• Buy 1 lot of Nifty CE at ₹100, sell at ₹130: Profit = ₹1500
• Sell 1 lot of Bank Nifty PE at ₹200: Premium Received = ₹2000

Turnover = |1500| + 2000 = ₹3500

5. When is Tax Audit Required for F&O Traders?

You need a tax audit under Section 44AB if:

• Turnover > ₹10 crore (with digital transactions)
• Turnover between ₹2 crore – ₹10 crore and profit < 6% of turnover
• You opt out of presumptive scheme and declare lower profit

Audit requires a CA to file Form 3CD and maintain books of accounts.

6. Presumptive Taxation Scheme for Small Traders

Under Section 44AD, if your turnover is under ₹2 crore:

• You can declare 6% of turnover as profits (if using digital payments)
• No need to maintain detailed books or undergo audit
• Use ITR-4 instead of ITR-3

Not allowed if you wish to declare a loss.

7. Claiming Expenses Against F&O Income

Since F&O income is business income, you can claim expenses such as:

• Brokerage and transaction charges
• Internet, electricity
• Advisory and research subscriptions
• Depreciation on laptop/mobile
• Home office rent or coworking charges

Keep documentary evidence for all claimed expenses.

8. Set-off and Carry Forward of F&O Losses

• F&O losses can be set off against any other business income or capital gains (not salary income)
• Unused losses can be carried forward for 4 years
• Must file ITR before the due date to carry forward losses

9. Comparison with Intraday and Delivery-Based Trading

10. Detailed Examples for Better Understanding

 Example 1: Profitable Option Selling

• Sold 10 lots Nifty 22000CE @ ₹120, bought back @ ₹80
• Lot size: 50
• Premium received: ₹60,000, paid: ₹40,000, Profit = ₹20,000
• Turnover = ₹20,000 + ₹60,000 = ₹80,000
• Tax @ slab rates

 Example 2: Loss in Futures

• Buy Bank Nifty Futures @ ₹43,000, Sell @ ₹42,000, Loss = ₹1,000 per lot
• 5 lots traded → Total Loss = ₹5,000
• Turnover = ₹5,000 (absolute)
• Set off against capital gains, carry forward if not used

 Example 3: Low-Profit, High Turnover

• Turnover = ₹45 lakh, Profit = ₹80,000 (1.7%)
• Less than 6% profit → Audit required

 Example 4: Salaried Trader with F&O

• Salary: ₹15 lakh, F&O profit: ₹2 lakh
• Total income = ₹17 lakh
• ITR-3 required, combine income heads

 Example 5: Presumptive Scheme

• Turnover: ₹80 lakh
• Declare 6% = ₹4.8 lakh as profit
• No audit, file ITR-4

11. FAQs on F&O Taxation

Q1: Can F&O loss be set off against salary income?
 No. It can be set off only against business or capital gains.

Q2: Is GST applicable on F&O trading?
 No, GST does not apply to F&O for retail traders.

Q3: Is audit mandatory every year if once opted out of 44AD?
 Yes, for the next 5 years, audit is compulsory.

Q4: Can I file ITR-2 for F&O trading?
 No. ITR-2 is only for capital gains, not business income.

Final Thoughts

F&O trading offers great opportunities, but comes with tax complexity. Whether you make profits or losses, ensure you file the correct ITR form, calculate turnover correctly, and maintain compliance to avoid notices and penalties.

For active traders, consulting a CA is highly recommended. Mail us at stoxntaxblog.com.
Stay tuned to StoxNTax.com for more such trading and tax guides!