Many people start trading futures and options (F&O) without thinking about tax until the first return is due, and then find that F&O income is treated quite differently from the share investing they knew. This guide explains, in general terms, how F&O income is usually treated in India and what records you need.
Important: this is education, not tax advice. Tax rates, thresholds, the forms to use and even section numbers are changed by budgets and new laws, and how they apply depends on your full situation. Check the current rules on the income tax department's website and speak to a qualified chartered accountant or tax adviser before filing.
Three kinds of market income
For tax purposes, gains from the market are usually sorted into three groups. Which group your income falls in decides how it is taxed, which losses it can be set off against and which return form you file.
| Activity | Usual treatment | In short |
|---|---|---|
| Futures and options (equity, index, commodity, currency) | Non-speculative business income | Taxed with your other income at your slab rate; expenses can be claimed |
| Intraday equity (buy and sell the same day, no delivery) | Speculative business income | Taxed at slab rate; losses can only be set off against speculative gains |
| Shares and funds held as investments | Capital gains (short or long term) | Special rates based on holding period |
Exchange-traded F&O is generally treated as non-speculative even though it may feel speculative, because the law has long carved it out. Someone who trades F&O occasionally alongside a salaried job is usually treated as running a small business for this part of their income.
How F&O profit or loss is worked out
Because it is business income, you work out the net profit or loss for the financial year (April to March) like a small business would:
Net F&O result = total profits − total losses − allowable expenses
Your broker's yearly profit and loss statement and the daily contract notes give the trade-by-trade results. Expenses directly related to trading may be claimable; traders commonly ask their adviser about brokerage and charges, internet and phone costs, data subscriptions, a share of computer costs and adviser fees. Which expenses are allowed, and in what proportion, is a question for your adviser.
Example. Over a year, a trader's option trades show ₹3,40,000 of gains on winning trades and ₹2,90,000 of losses on losing trades. The trading result is a profit of ₹50,000. If allowable expenses come to ₹20,000, the business income is ₹30,000, added to the trader's other income and taxed at the applicable slab rate.
Turnover: not what most people think
For a normal business, turnover is total sales. For F&O trading, that would be a meaningless, enormous number, so turnover is calculated in a special way set out in professional guidance for accountants. A widely used method adds up the absolute value of each trade's profit or loss (treating losses as positive numbers), and for options may also include the premium received on sold options. Practice has varied over the years, so ask your adviser which method applies now.
Using the example above: ₹3,40,000 of gains plus ₹2,90,000 of losses (counted as positive) gives a turnover of about ₹6,30,000, even though the profit is only ₹50,000.
Every trade adds to turnover, win or lose. A trader who sells the NIFTY straddle every morning and buys it back every afternoon creates hundreds of trades a year. Here is the live straddle as an example of the kind of position that, traded daily, quickly builds up a long record:
Each round trip on a chart like this is one or more entries in your yearly statement, and each one counts towards turnover and needs to be accounted for.
When a tax audit may be needed
A tax audit means a chartered accountant examines your trading accounts and signs a report that is filed with your return. Whether you need one generally depends on:
- Your turnover compared with a threshold set in the law (higher thresholds apply when nearly all transactions are digital, which is the case for exchange trading).
- Your profit compared with turnover, and your total income. In some situations, declaring a loss or a low profit while your total income is above the basic exemption limit can lead to an audit requirement even when turnover is small.
- Whether you used a presumptive scheme in earlier years.
These thresholds and conditions have been changed several times. Check the current figures with your adviser well before the due date, because an audit has its own, earlier deadline.
Setting off and carrying forward losses
Many F&O traders end the year with a loss. How it is treated matters:
- In the same year, a non-speculative business loss from F&O can generally be set off against other income such as interest, rent or capital gains, but not against salary.
- Unused loss can generally be carried forward to future years and set off against future business income only, for a limited number of years (check the current limit).
- Carrying forward needs a return filed on time. If you miss the due date, you can lose the right to carry the loss forward. This is one of the most common and costly mistakes.
- Speculative losses (from intraday equity) are kept in a separate box: they can only be set off against speculative gains, and have their own carry-forward limit.
Records to keep
- Daily contract notes and the yearly profit and loss and tax statements from your broker.
- Bank statements showing money moved to and from the trading account.
- Bills for any expenses you plan to claim.
- Your annual information statement from the tax portal, to check that it matches your broker's figures.
- A trading journal, which is not required for tax but makes year-end much easier.
Business income generally needs a different return form from the one salaried people usually file, and some traders must keep proper books of account. Your adviser will tell you which applies.
Other points to know
- Advance tax. If you make a profit, tax may need to be paid in instalments during the year, not just at filing time. Interest can apply if you do not.
- Costs reduce profit, not just returns. The charges on each trade appear in your statement and affect the business result.
- Your long-term investments are a separate matter. Shares you hold for years, tracked for example in My portfolio, are usually capital assets, not part of your F&O business. Mixing the two, for example by trading the same shares in and out every day, can blur the line, which is another reason to keep clear records.
Common mistakes
- Treating F&O as capital gains and filing the wrong form.
- Not reporting losses because "there is no tax to pay", and so losing the right to carry them forward.
- Filing late, especially when an audit is needed.
- Using old thresholds or section numbers from articles written before recent changes.
- Doing it alone in a complicated year. The fee for a good adviser is usually small next to the cost of a mistake.