If you trade futures and options (F&O) or do intraday trading, your income is generally taxed as business income rather than capital gains. This affects the ITR form you file, how you calculate taxable income, whether a tax audit applies, and how you can set off and carry forward losses.
This guide explains how F&O and intraday trading are taxed, how to calculate turnover, when a tax audit may apply, and how to report and carry forward trading losses.
For return filing instructions, see our ITR-3 guide. For the overall filing process, see our ITR filing guide for FY 2025-26.
Key takeaways
- Income from F&O trading on recognised stock exchanges is generally treated as non-speculative business income. Intraday equity trading is treated as speculative business income.
- Turnover is calculated using the prescribed method for tax purposes and is not the same as the total contract value.
- Tax audit requirements depend on your turnover and the conditions specified in the Income Tax Act.
- You must file your return by the due date if you want to carry forward eligible business losses.
How F&O and intraday trading are classified
The Income Tax Act classifies different types of market transactions differently for tax purposes.
Income from futures and options traded on a recognised stock exchange is generally treated as non-speculative business income under the proviso to Section 43(5).
Income from intraday equity trading, where shares are bought and sold on the same day without taking delivery, is generally treated as speculative business income under Section 43(5).
Delivery-based share transactions are generally taxed as capital gains unless the facts and circumstances indicate that the activity constitutes a business.
Business income from F&O and intraday trading is reported in ITR-3. Delivery-based investments that are taxable as capital gains are reported under the capital gains schedule in the applicable return form.
How F&O and intraday trading are taxed
Income from F&O and intraday trading is taxed at your applicable income tax slab rates. There is no separate tax rate for trading income. The income is added to your total taxable income and taxed under the regime you choose, with the new tax regime applying by default.
Since this is business income and not capital gains taxed at special rates, eligible taxpayers may claim the rebate under Section 87A, subject to the conditions in the Income Tax Act.
How to calculate turnover
For tax purposes, turnover is not the total value of your trades or contracts.
Under the ICAI Guidance Note on Tax Audit, turnover is generally calculated by adding the absolute value of profits and losses from all eligible trades during the financial year.
For example, if your profitable trades total ₹8 lakh and your loss-making trades total ₹6 lakh, your turnover is ₹14 lakh. Your taxable business profit is ₹2 lakh, but the turnover for tax purposes is ₹14 lakh.
For options trading, turnover is generally based on the absolute profit and loss from each trade. Refer to your broker’s tax P&L statement and verify the figures against your own trading records.
When a tax audit applies
A tax audit under Section 44AB depends on the conditions in the Income Tax Act, including your turnover and, in some cases, your use of the presumptive taxation scheme.
For most traders, the audit threshold is ₹10 crore where cash receipts and cash payments do not exceed 5% of total receipts and payments. Since F&O and intraday transactions are generally settled through banking channels, many retail traders fall within this higher threshold.
A tax audit may also be required in certain cases if you previously opted for presumptive taxation under Section 44AD and no longer satisfy the prescribed conditions.
Review the audit provisions carefully before filing, especially if you have previously used the presumptive taxation scheme.
Set-off and carry forward of trading losses
The rules for setting off and carrying forward losses depend on whether the loss is from F&O trading or intraday equity trading.
| F&O (non-speculative) | Intraday equity (speculative) | |
| Same-year set-off | Against any income except salary | Only against speculative business income |
| Carry forward | Up to 8 assessment years | Up to 4 assessment years |
| Set-off in future years | Against eligible business income | Only against speculative business income |
| Condition | Return must be filed by the due date | Return must be filed by the due date |
A non-speculative business loss from F&O trading can be set off against most heads of income in the same year, except salary. Any unabsorbed loss can generally be carried forward for up to eight assessment years if you file your return by the due date.
A speculative business loss from intraday equity trading can be set off only against speculative business income. Any unabsorbed loss can generally be carried forward for up to four assessment years if you file your return by the due date.
Business expenses you can claim
You can deduct business expenses that are incurred wholly and exclusively for your trading activity, subject to the conditions in the Income Tax Act.
Common deductible expenses include brokerage, Securities Transaction Tax (STT), GST on brokerage, exchange transaction charges, SEBI turnover fees, internet and phone expenses used for trading, trading software and market data subscriptions, professional or advisory fees, and depreciation on eligible business assets such as computers.
Keep broker contract notes, annual profit and loss statements, bank records, invoices, and other supporting documents. Expenses that are not allowable under the Income Tax Act, including cash payments above the prescribed limit, cannot be claimed.
Should you use presumptive taxation under Section 44AD?
If you are eligible for the presumptive taxation scheme under Section 44AD, you may choose to declare income at the prescribed percentage of turnover instead of maintaining regular books of account. Eligibility, turnover limits, and other conditions are specified in the Income Tax Act.
Before choosing this option, compare it with the regular method of computing business income. Under the presumptive scheme, you generally cannot claim individual business expenses separately, and the rules on carrying forward losses and opting out of the scheme may affect future years.
Many active traders prefer to compute their actual business profit or loss and file ITR-3 instead of using the presumptive taxation scheme.
Advance tax and filing your return
If your tax liability after TDS exceeds ₹10,000 during the financial year, you are generally required to pay advance tax in instalments. Interest under Sections 234B and 234C may apply if you do not pay the required amount within the prescribed timelines.
Before filing your return, collect your broker’s annual tax statement and profit and loss statement, calculate your turnover and business profit or loss, total your allowable business expenses, and reconcile your figures with Form 26AS and the Annual Information Statement (AIS).
Report F&O and intraday trading income under the business income schedule in ITR-3. Compute your tax, pay any balance tax due, submit your return, and complete e-verification within 30 days.
For Assessment Year 2026-27, the due date for non-audit ITR-3 filers is 31 August 2026. Audit cases are generally due by 31 October 2026.
Common mistakes
- Reporting F&O income as capital gains instead of business income.
- Calculating turnover using contract value instead of the prescribed turnover method.
- Combining F&O, intraday, and delivery-based transactions instead of reporting them under the correct tax treatment.
- Filing after the due date and losing the ability to carry forward eligible business losses.
- Not reconciling trading income and TDS with Form 26AS and the AIS before filing.
A note on filing correctly
Reporting trading income requires you to classify transactions correctly, calculate turnover using the prescribed method, choose the correct ITR form, and apply the rules for set-off and carry forward of losses.
If you have carried-forward losses, turnover close to the audit threshold, or a mix of trading and investment income, review your return carefully before filing. Professional fees paid for tax advice relating to your trading business may be deductible, subject to the conditions in the Income Tax Act.
File your return in the correct form, calculate turnover accurately, and file by the due date if you want to preserve eligible business losses.
Frequently asked questions
Is F&O income business income or capital gains?
Income from futures and options traded on recognised stock exchanges is generally treated as non-speculative business income under Section 43(5). It is reported in ITR-3 and taxed at the applicable income tax slab rates.
How is F&O turnover calculated?
For tax purposes, turnover is generally calculated as the absolute value of profits and losses from eligible trades, rather than the total contract value, in accordance with the ICAI Guidance Note on Tax Audit.
Is a tax audit mandatory for F&O traders?
Not in every case. Whether a tax audit applies depends on your turnover and the conditions specified in Section 44AB and other relevant provisions of the Income Tax Act.
Can I carry forward F&O losses?
Yes. Eligible non-speculative business losses can generally be carried forward for up to eight assessment years if you file your return by the due date and satisfy the conditions in the Income Tax Act. Speculative losses from intraday equity trading are subject to different rules.
What tax rate applies to F&O profits?
F&O profits are taxed at your applicable income tax slab rates. They do not have a separate tax rate.
Which ITR form should an F&O or intraday trader file?
Business income from F&O and intraday trading is generally reported in ITR-3. Delivery-based investments that are taxable as capital gains are reported separately under the applicable capital gains schedule.
Sources and references
- Income Tax Department, e-filing portal — incometax.gov.in
- Income Tax Act, 1961 — Sections 43(5), 44AB, 44AD, 71, 72, 87A, 234B, 234C
- ICAI Guidance Note on Tax Audit under Section 44AB (turnover computation)
Disclaimer
This guide is for general informational purposes and is accurate to the best of our knowledge as of July 2026. The turnover and audit rules for traders are technical and fact-specific, and tax laws can change. Please verify current details on incometax.gov.in and consult a qualified Chartered Accountant experienced in trader taxation before acting on any information here.
