Participating in different and multiple securities constitutes the basis of India’s capital markets, allowing investors to share in wealth creation, risk management, and liquidity provision.
Securities refer to financial products which can be bought and sold in a free market, symbolising ownership (shares), creditorship (debts and debentures), or rights linked to ownership (derivatives like options and futures).
In India, the trade mostly takes place on organised stock exchanges such as the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), which are regulated by the Securities and Exchange Board of India (SEBI) in order to promote transparency and protect investors.
What are Futures and Options (F&O)?
Futures and options (F&O) are derivative contracts in the financial market whose price is contingent on the underlying, which can be indexes, stocks, commodities, or currencies. F&O are utilised to hedge, speculate, and arbitrage, among others.
Futures:
A futures contract is a commitment to buy or sell an underlying security on a future date for a price agreed upon. Futures are standardised and are traded on recognised exchanges, like the NSE and BSE. Suppose, when someone purchases a Nifty futures contract at 20,000, he or she commits to purchase the Nifty index at the said price at expiry, irrespective of the existing market price. Futures involve margin money and are marked to market on a daily basis.
Options:
A choice is a contract that gives the purchaser the right to purchase (call) or sell (put) the underlying security at an agreed-upon price prior to or at the expiration date. The writer (seller) of the option is obligated to finalise the commitment if the purchaser exercises it. Purchasers of options pay a premium, their maximum potential loss.
F&O trading involves selling or buying of these contracts to gain profit on the basis of the price movement in the underlying asset without truly assuming ownership of the asset. For example, traders can purchase call options if they are expecting a rise in prices or sell futures when prices are expected to fall. F&O trading offers leveraged positions, which allow one to carry big contract sizes with minimal cash, but with a higher risk as losses are more than the initial investment, particularly in futures or selling options.
Understanding Taxation on F&O Trading Income
F&O dealing in equities, commodities, or currency derivatives is not treated as speculative income in India. This is because of Section 43(5) of the Income Tax Act, 1961, which excludes F&O contracts traded on recognised stock exchanges from being treated as “speculative transactions,” subject to certain conditions.
Therefore, gains and losses on F&O are accounted for as non-speculative business income.
This means that –
- Profits are taxed equally to normal business income.
- Direct costs incurred for revenue generation can be waived.
- Losses, if any, will be handled differently from speculative losses, and better set-off rules apply.
Types of F&O Income
- F&O trading profit is a positive difference after deducting the expenses from turnover.
- F&O trading loss is a negative difference after deducting the expenses.
- Intraday equity (speculative) and F&O (non-speculative) revenues can be disclosed on one Income Tax Return (ITR), but treated separately for taxation.
Turnover in F&O
Turnover for taxation and audit purposes is not the contract value. It is computed as follows:
Absolute Profit Method:
Turnover is the sum of absolute amounts of profits and losses incurred on all trades during the year.
Example:
- Trade 1: ₹50,000 gain
- Trade 2: ₹30,000 loss.
- Turnover: ₹50,000 + ₹30,000 = ₹80,000.
Option premium:
The received premium is part of turnover. This amount of turnover is vital for the Section 44AB tax audit. It decides presumptive taxation eligibility.
Tax Rates on F&O Income
As F&O income is business income, the same is taxed under normal slab rates for individuals:
Income Slab (for FY 2024–25, old regime)
Tax Rate
Up to ₹2.5 lakh Nil
₹2.5 lakh – ₹5 lakh 5%
₹5 lakh – ₹10 lakh 20%
Above ₹10 lakh 30%
Surcharge and cess as per law.
Different slab rates are applicable if you choose the new tax regime, but Chapter VI-A deductions (such as 80C) are generally not available.
Allowed Expenses as Deductions
Certain expenses related to F&O trading can be deducted by you, which include –
- brokerage and transaction charges
- STT is not an allowed deduction in Section 36, although it could form a part of the business revenue as a trading expense.
- Demat account fees.
- Telephone and internet charges.
- Subscription fees for data and research services.
- Rent and utility charges related to the office.
- Depreciation on trading assets, like computers.
- Wages paid to assistants or workers for trading purposes.
- Expenses incurred for market seminars (if they are directly connected).
Loss Setoff and Carry-forward Regulations
Non-speculative business losses (F&O losses) can be offset against any income (save salary) in the same financial year, i.e., capital gains, rent income, and interest income. These losses can be carried forward for 8 years for assessment and can be set off only against business income. Speculative losses, like intraday trading losses, are subject to stricter limits and can be set off only against speculative income with a four-year carry-forward.
Tax Audit Requirements
Audits are required under Section 44AB
- If the annual turnover of a company is more than ₹1 crore (or ₹10 crore when cash transactions are ≤5%).
- If you are reporting income less than 6% (for digital transactions) or 8% (for cash transactions) of your turnover, and your overall income is more than the basic exemption limit, an audit will be necessary.
A Chartered Accountant will do the tax audit, and Form 3CB-3CD has to be filed.
Presumptive Taxation (Section 44AD)
Presumptive taxation permits the declaration of income as 6% of turnover (for digital receipts) or 8% of turnover (for cash receipts), eliminating the need to maintain comprehensive accounting records. However:
- Section 44AD is available only to residents (individuals, HUFs, partnerships).
- If you opt for the presumptive scheme, you cannot offset losses, since income is assumed.
- Most traders exclude themselves from the presumptive scheme if they want to set off losses.
Advance Tax and TDS Implications
If your earnings from Futures and Options (F&O) exceed ₹10,000 per annum, you are liable to pay advance tax in four instalments (June 15, September 15, December 15, and March 15). Delayed payment of advance tax can attract interest under Sections 234B and 234C. In addition, F&O income is exempt from TDS deduction in most cases, and thus requires self-assessment and payment.
ITR Filing for F&O Traders
ITR-3 form is for individuals and Hindu Undivided Families (HUFs) with business or professional income, including F&O income. Accounts need to be maintained unless a presumptive scheme is being run. Further, the audit report, in case of necessity, has to be filed before filing ITR.
Practical Tips for F&O Traders
Effective discipline, judicious risk management, and compliance know-how are necessary to succeed in F&O markets.
- Know the product first – Before trading, know the margin requirements, premiums, and expiry rules for futures and options.
- Set your entry, exit, and stop-loss levels clearly before starting to trade to avoid spur-of-the-moment decisions.
- Risk only what you can spare to lose – F&O is a leverage product; use a small position size against your capital so that you minimize downside risk.
- Use stop-losses with discipline to avoid large drawdowns. Avoid “averaging down” losing positions without having a good plan.
- Use high leverage with care, as it can both multiply gains and losses.
- Keep track of key dates, i.e., contract expiration dates, earnings releases, and market events capable of triggering volatility.
- Hedge your positions to spread risk over several instruments or expiry dates. Avoid investing all your money in one contract.
- Maintain trade records that are detailed, including complete brokerage statements and profit and loss statements for tax purposes.
- Review and analyse past trades regularly to find weaknesses and improve your strategy.
- Control emotions – Fear and greed can impair judgment; stick to your rules even in the aftermath of major winnings or losses.
- Compliance with tax rules relating to F&O income, i.e., advance tax, ITR-3 filing, and audits (as applicable).
- Make effective use of technology like trading platforms, charting software, and alerts to increase the efficiency of trade execution.
Conclusion
The income from F&O trading in India follows the principles for non-speculative business income, such that the expenses related to this income could be claimed, losses could be set off against most other incomes (except salary), and the losses could be carried forward for a maximum period of eight years.
Still, this also comes with the commitments of keeping proper accounting books, complying with tax audit requirements in case of exceeding turnover or profit limits, and making advance tax payments on time to avoid interest and penalties.
Since F&O trading is through leverage and high volatility, it is important to risk-manage and keep accurate financial books, since these are as important as completing trades well.
Choosing the right ITR form (usually ITR-3), understanding slab-based taxation, and following SEBI and Income Tax Act rules are crucial to avert legal and financial issues.
