Futures & Options (F&O) — Tax Treatment & ITR 2025

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1. Quick primer — what are futures and options?

Futures are standardized contracts to buy or sell an underlying (stock, index, commodity, currency) at a pre-agreed price on a specified future date. They obligate both buyer and seller (unless squared off).
Options give the buyer the right (not obligation) to buy/sell the underlying at a strike price; the seller (writer) has the obligation if the buyer exercises.
Traders use F&O for hedging (protecting exposure), speculation (betting on price movement) and arbitrage (price differences across markets).

(These mechanics determine how P&L arises and therefore how tax rules are applied.)

2. How Income from F&O is classified for income-tax

For income-tax purposes in India, profits and losses from F&O trading are treated as business income — specifically non-speculative business income (i.e., not “speculative business” as in intraday equity delivery/speculative betting rules). This means F&O P&L is reported under Profits & Gains from Business or Profession (PGBP).

Why this matters: Business income rules (not capital-gains rules or speculative loss rules) determine how you:

compute turnover for audit thresholds,
claim expenses/deductions,
carry forward losses and set them off later.

3. Turnover / “business turnover” for F&O — how to compute (why it’s important)

Tax / audit rules use a special “trading turnover” concept for market traders (different from literal buy×sell value):

Futures: turnover = sum of absolute value of profits and losses on each futures trade (i.e., add absolute favourable and unfavourable differences).
Options: turnover = sum of absolute profits & losses (i.e., add absolute favourable and unfavourable differences).
Total F&O turnover = futures turnover + options turnover.

Why turnover matters: it determines whether you need a tax audit (see below) and whether presumptive taxation may be available.

4. Tax audit & presumptive taxation — what to watch for

Tax audit (Section 44AB): A business is subject to tax audit if turnover/gross receipts exceed certain thresholds or other conditions apply. For traders, commonly quoted triggers:
- Turnover > ₹10 crore — audit required
- If you opt for presumptive taxation under Section 44AD (business turnover ≤ ₹2 crore and you declare the minimum prescribed profit %) then special rules apply — otherwise an audit may be required if your declared profit is below the prescribed percentage (e.g., <6%/8% depending on digital receipts).
Note: applicability of 44AD for trading businesses is technical — many traders avoid it because it can deny accurate loss recognition and invites scrutiny.

Practical tip: Most active F&O traders report under regular business (ITR-3) with books and P&L, unless they deliberately and safely fit 44AD conditions — consult your CA before choosing presumptive route.

5. Rates & other transaction taxes (STT) that affect net cost

Securities Transaction Tax (STT) applies on certain exchange trades (including sale of futures and sale of options). In recent budgets the STT on F&O was increased (futures to 0.02% and options to 0.1% on the sell side) — this raises trading costs and affects net return and allowable expenses calculation.
STT paid is an allowable business expense for traders (if treated as business income).

6. What expenses are deductible against F&O business income?

When F&O is business income, you can deduct expenses that are wholly and exclusively incurred for the business, for example:

Brokerage, exchange transaction charges, clearing charges, stamp duty and STT (if treated as business expense), and other trading fees.
Internet, phone, subscription fees for data/terminals, software / platform fees, office rent (proportionate), depreciation on computer/laptop/phone used for trading, professional / accounting fees, and bank charges.

Keep supporting documents — brokers’ contract notes, bank statements, invoices and depreciation schedules — because audits and notices often ask for these.

7. Losses, set-off and carry forward rules (very important)

Non-speculative business losses (F&O): can be set off against other business income in the same year (subject to normal rules) and, if unabsorbed, carried forward for 8 assessment years to be set off against future business income. This is a key benefit: legitimate F&O losses are not wasted — they can reduce future taxable business profits.
Speculative business loss (separate head) has stricter rules — it can be set off only against speculative income and carried forward for 4 years.
(Remember: F&O is generally non-speculative, so this stricter rule usually doesn’t apply.)

8. ITR form, reporting & compliance

ITR selection: If you have F&O income reported as business income, you typically file ITR-3 (or ITR-4 Sugam if you use presumptive regime and meet criteria).
New ITR updates introduced profession/business codes for F&O traders (ITR-3/4 codes etc.) — ensure you use the correct code.
Records to maintain: contract notes, margin statements, P&L ledger, bank statements, bills for expenses, depreciation schedules, supporting docs for STT/charges.
Timing: file ITR on time — if audit applies, you have different deadlines. If you miss the ITR due date, you may lose the benefit to carry forward losses.

9. Common practical issues & traps

Turnover mismatch: Broker statements show trade value, Mis-computing turnover can wrongly trigger an audit. Use broker tax reports and reconcile.
Presumptive tax pitfalls: Opting for 44AD without checking conditions can be risky — it can limit set-offs or lead to later notices.
Mixing incomes: If you have salary + trading losses, remember non-speculative business loss cannot be set off against salary; but it can reduce other business income or be carried forward.
STT treatment: STT is a transaction cost — ensure it’s correctly accounted as expense when you report business income.

10. Example (simplified) — how a trader’s P&L flows into tax

Year FY: F&O net P&L = ₹3,00,000 (profit)
Allowed expenses (brokerage, internet, depreciation, STT) = ₹80,000
Taxable business income = ₹2,20,000 (taxed at normal slab rates; if you are in new/old regime choose accordingly)
If loss instead, you can carry forward for up to 8 years to set off against future business profits.

11. Recent / important changes to keep in mind

STT on F&O was increased in recent budgets (futures/options STT hike) — raises transaction costs.
ITR and reporting updates: tax department has refined ITR codes and e-filing options for traders — keep an eye on the official income-tax portal updates and your broker’s tax P&L reports.

12. Practical checklist for F&O traders (actionable)

Use ITR-3 for business income unless you consciously opt for 44AD after CA advice.
Compute F&O turnover correctly and reconcile with broker reports.
Maintain books & supporting documents (contract notes, bank statements, bills, software subscriptions, hardware invoices).
Claim only expenses wholly & exclusively for trading (brokerage, STT, internet, depreciation).
If turnover or profits cross audit thresholds or you plan presumptive taxation — get a CA to decide audit vs. regular route.
If you record losses, ensure you file returns on time to preserve carry-forward rights (8 years for non-speculative business losses).