A majority of retail investors dabbling in Futures and Options (F&O) trading have ended up on the losing side, with SEBI data revealing that nearly 93% of them recorded average losses of Rs 2 lakh each over FY2022–23 and FY2023–24. Yet, many traders continue to overlook their tax obligations, wrongly assuming that losses don’t need to be reported in their Income Tax Returns (ITRs).
Despite the growing volume of retail participation in derivatives trading, awareness of tax obligations remains alarmingly low among many F&O traders. A common mistake is failing to report F&O income—whether profit or loss—on the assumption that tax liability arises only when profits are made. However, under-reporting or non-reporting of F&O transactions can trigger scrutiny from the tax department, which now has access to detailed market transaction data.
Why reporting losses is important
Contrary to popular belief, reporting F&O losses can be beneficial. Losses from F&O trading—classified as non-speculative business losses—can be set off against other incomes (excluding salary income) or carried forward for up to eight years. This not only helps in reducing future tax liabilities but also keeps traders in good standing with the tax department.
“Income from Futures and Options (F&O) trading is treated as non-speculative business income under Section 43(5) of the Income Tax Act,” explained CA (Dr.) Suresh Surana. “It is taxable at slab rates after allowing deductions for expenses incurred wholly and exclusively for business purposes—such as brokerage fees, internet charges, and advisory services.”
ITR-3 and tax audit requirements
F&O traders must file their returns using ITR-3, which is designated for individuals and Hindu Undivided Families (HUFs) with income from profits and gains of business or profession (PGBP). Additionally, a tax audit under Section 44AB may be required if:
Turnover exceeds the prescribed threshold (Rs 10 crore if digital transactions are 95% or more; Rs 1 crore otherwise)
The trader declares lower profits than prescribed under the presumptive taxation scheme (Section 44AD)
Advance tax payments also apply if the total tax due exceeds Rs 10,000 in a financial year.
What expenses can be claimed?
Since F&O trading is treated as business income, traders can claim deductions for:
Brokerage and exchange transaction charges
Advisory and research subscription costs
Telephone and internet bills
Salary to employees (if applicable)
Office rent and utilities
Maintaining a proper record of these expenses is crucial, as they must be reflected in the profit and loss (P&L) statement.
Bookkeeping Rules for F&O Traders
Taxpayers are required to maintain books of accounts if:
Total income exceeds Rs 2.5 lakh or gross receipts exceed Rs 25 lakh in any of the preceding three years (for individuals or HUFs)
For other businesses, the limit is Rs 1.2 lakh in income or Rs 10 lakh in gross receipts
Proper bookkeeping—covering trading statements, bank records, and expense bills—is essential for accurate tax filing and audit readiness.
F&O rules for NRIs
For Non-Resident Indians (NRIs), F&O income is treated the same—as non-speculative business income. However, NRIs must also comply with cross-border investment norms under RBI and SEBI, and may be eligible for Double Taxation Avoidance Agreement (DTAA) benefits and foreign tax credits, depending on their country of residence.
Surana added: “For NRIs, the tax treatment of F&O income is largely similar. The income is classified as non-speculative business income and taxed at slab rates applicable to individuals. NRIs are also subject to advance tax, tax audit, and bookkeeping requirements similar to those applicable to residents. Where F&O income is also taxable in the country of residence, NRIs may avail relief under the relevant Double Taxation Avoidance Agreement (DTAA) and claim Foreign Tax Credit (FTC), subject to applicable conditions. While the core taxability remains consistent for both residents and NRIs, NRIs may need to ensure additional regulatory compliance under RBI and SEBI guidelines governing cross-border investments.”
In summary, while the majority of F&O traders may be incurring losses, ignoring tax compliance is a risky move. Reporting accurately not only avoids penalties but also unlocks tax advantages that could benefit traders in the long run.
