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Trading in Futures & Options (F&O) - Understand the outcomes

Trading in F& O segment is very common now. Many individuals do & enjoy trading in F&O. Making profit/ losses by trading in futures & options brings some tax requirements as well. Lets discuss the outcomes of trading in futures & options from income tax point of view.

Profits/losses from derivatives and F&O transactions are treated as Non speculative Business Profits/losses:

Trading in F&O segment is different then investing in shares & mutual funds. F&O transactions are completed without delivery of securities. Anyone trading in F&O is treated as trader and profits on such transactions is to be treated as business profits.

CBDT by its notification on 25/01/2006 made it clear that derivatives transactions will be treated as non speculative transactions. Any profit/loss on F&O transactions is treated as non speculative business profit/loss; taxable under the head profits and gains of Business or Profession and all formalities, rules, laws applicable to business & profession will also be applicable.

For Assessment Year 2020-21 ITR 3 is the applicable Income Tax Return Form:

There is a simple understanding that salaried person shall file ITR-1 or ITR-2, but this is not the case when you are having profit/loss from F&O trading. F&O gains/losses being treated as business income; brings ITR 3 into play. So if you have F&O income/loss you should file ITR 3 for the Assessment Year 2020-21.

As Department updates the Income Tax Return forms every year, the ITR form number may change in respective assessment year. So it is important to know that the return form to be filed for respective assessment year, in case of profit/loss from F&O trading, shall be the return form which is applicable to individuals having income from business & profession.

Applicability of Tax Audit:

Section 44AB of the Income Tax Act covers provisions relating to Tax Audit. Accordingly Tax Audit in case of derivatives and F&O trading will be required in following situations.
  • If there is profit in F&O transactions and total turnover of such F&O trading exceeds 1.00 crore (₹ 5.00 crore if Cash receipts & payments do not exceed 5% of total Turnover & Total Payments); Tax Audit u/s 44AB will be required.
  • When there is profit and such profit is less then 6% of total turnover of such F&O trading; Section 44AD comes into play. Accordingly Tax Audit u/s44AB will be required if total income (income from all sources) exceeds the basic exemption limit.
We can also say that Tax Audit is required if you have turnover exceeding 1.00 crore/ ₹ 5.00 crore(as applicable), or profit declared is less then 6% of total turnover and total income exceeds the basic exemtion limit.

Note: As per section 44AD of the Income Tax Act, Business having total turnover/sales/gross receipts of less then 2.00 crore shall disclose atleast 6% of their total turnover as their net business income. If net business income disclosed is less then 6% of total turnover and whose total income exceeds the maximum amount which is not chargeable to income tax (ie. basic exemption limit) maintenance of books of accounts u/s 44AA & Tax Audit u/s 44AB is mandatory.

Read in detail about Section 44AD-Presumptive taxation scheme

Set off & carry forward of Loss in F&O

  • Losses from F&O trading are treated as non speculation business loss. These can be set off against any income other than salary with in the same financial year.
  • If complete F&O loss could not be set off in one year it can be carried forward & set off in next 8 years.
  • To carry forward the loss, Income tax return must be filed with in the due date. A loss can not be carried forward by filing a belated return.
How to Calculate F&O turnover

The calculation turnover in derivatives & F&O transactions is different. Its not calculated in the manner in which other business turnovers are calculated. It is to be determined as follows:
  1. The aggregate of favourable and unfavourable differences (ie. profits and losses) shall be taken as turnover. 
  1. Premium received on sale of Options is also to be included in turnover. 
  1. In respect of any reverse trades entered, the difference thereon, should also form part of the turnover.
Click here to know in detail about calculation of F&O turnover with example

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