Taxation of F&O Trading

Follow one trade. You place an order. For a buyer the full premium must be in the account before the order executes; for a seller, margin is blocked. Each day the gain or loss on open positions is settled in cash (mark-to-market). At expiry an index contract settles in cash and a stock contract in shares. At year end your broker gives a tax profit-and-loss report. From that you compute turnover, test whether an audit is needed, file the return and, if there was a loss, carry it forward.

Money moves in the first three steps. Paperwork moves in the last five. The mistake most people make is treating the paperwork as something for March, when the records are created on the day of every trade. Keep contract notes, the broker ledger and bank statements for the year.

Buying shares and holding them is an investment. The profit is capital gains, short-term or long-term depending on how long you held. Futures and options are different. Under the Income-tax Act, 1961, profit or loss on derivatives traded on a recognised stock exchange through a registered intermediary is treated as non-speculative business income. That is the effect of section 43(5). It applies whether you trade once or a thousand times.

Intraday trading in equity shares (bought and sold the same day without delivery) is treated as speculative business income, which is a separate bucket. Delivery-based equity gains are capital gains. Each bucket has its own set-off rules, so the label matters.

As business income, your F&O profit is added to your total income and taxed at your slab rate. You may deduct expenses that are wholly and exclusively for the business, such as brokerage, exchange charges, STT and a reasonable share of internet or software costs, if you can support them with bills. On the other side, business treatment brings books of accounts, possible tax audit and tax at slab rates, which can be higher than the flat rates that apply to some capital gains.

Securities Transaction Tax (STT) is a tax collected by the exchange on each taxable sale, win or lose. Think of it as a toll on every trip, whether or not you reach your destination. Budget 2026 raised the STT rates on derivatives from 1 April 2026, as set out in the Finance Bill 2026 explanatory memorandum (clause 143): on sale of an option, from 0.1% to 0.15% of the premium; on sale of an option that is exercised, from 0.125% to 0.15% of the intrinsic price; and on sale of a future, from 0.02% to 0.05% of the traded price.

Illustration with Nifty at 24,500 and a lot of 65 units. Selling one futures lot: contract value 65 x 24,500 = Rs 15,92,500. STT at 0.05% = Rs 796.25 (it was Rs 318.50 at 0.02%). Selling one option lot at a premium of Rs 100: premium value 6,500. STT at 0.15% = Rs 9.75 (it was Rs 6.50 at 0.1%). Small per trade, but a frequent trader pays it many times, and it comes on top of brokerage and other charges.

STT is charged on the sell side of the trade, and an option that is exercised at expiry is charged on its intrinsic price under the rates above, not on the full index value. Older articles describe an "STT trap" based on the earlier basis; do not rely on those. Rules for stock options that end in physical delivery have their own charges; check your broker contract note and the current STT table on incometax.gov.in (Needs verification for stock delivery).

A loss in F&O is a non-speculative business loss. In the same year it can be set off against income under other heads, such as capital gains, house property and other sources, and against other business income. It cannot be set off against salary income.

If part of the loss is still unused, it can be carried forward for eight years after the year of loss. In later years it can be set off only against business income, and F&O profit counts. There is an important condition: the return for the year of loss must be filed on or before the due date. If you file late, you lose the right to carry the business loss forward. This condition is stated on the Income Tax Department website.

The limits are worth stating plainly. Setting off a loss reduces tax, but it does not bring the money back. Carried-forward losses are only useful if you later have business profit within eight years. And carry-forward requires that your accounts and return are in order, so keep proper records.

A person with business income and books usually files ITR-3, which has schedules for business profit, balance sheet and capital gains. Check the form notified for the year on the Income Tax Department website. Due dates are notified each year and may be extended. For FY 2025-26 (assessment year 2026-27), secondary sources report 31 October 2026 for cases that need a tax audit and an earlier date for others (Needs verification on incometax.gov.in).

The next module explains how turnover is computed and when a tax audit is required. Both come before the return, because an audit report must be ready before the ITR can be filed.