F&O Income Tax: ITR Form, Turnover and When Audit Applies

F&O income tax works differently from tax on shares you invest in. Profit or loss from futures and options is business income, not capital gains. You report it in ITR-3, pay tax at your slab rate, and can carry a loss forward for eight years. Whether you need a tax audit depends mainly on your turnover.

Why is F&O income business income?

You may have a job and trade options on the side. The law still treats that trading as a business. Derivative trades done on a recognised stock exchange are kept out of the definition of a speculative transaction, so they are a normal, non-speculative business. Intraday equity trades, where you buy and sell the same day without taking delivery, are speculative.

This is the position for FY 2025-26 under the Income-tax Act, 1961. There is no special rate for F&O. The profit is added to your salary and other income and taxed at your slab.

Which ITR form?

ITR-3. ITR-1 and ITR-2 cannot carry business income, even if you made a loss. The ITR-3 for assessment year 2026-27 asks for intraday turnover and income, and F&O turnover and income, separately. See which ITR form to file.

How is F&O turnover calculated?

This is where most traders go wrong. Turnover is not the lot value you traded. Take each trade, see whether it ended in a profit or a loss, and add all the figures as positive numbers. For options, the common method is the same: the difference between buy and sell premium on each trade.

One caution. Tax professionals differ on whether the premium received on selling options should be added on top. This article follows the absolute profit and loss method. If your options turnover is close to an audit limit, ask your CA which method they use.

A worked example

Karan has a salary and trades F&O. In FY 2025-26 he closed four trades:

• Nifty futures: profit of Rs 30,000
• Bank Nifty options: loss of Rs 45,000
• Stock futures: profit of Rs 12,000
• Nifty options: loss of Rs 62,000

Turnover is Rs 30,000 + Rs 45,000 + Rs 12,000 + Rs 62,000, which is Rs 1,49,000. His net trading result is a loss of Rs 65,000. Brokerage, exchange charges and other costs came to Rs 15,000, so the business loss is Rs 80,000.

Karan also earned Rs 50,000 as bank interest. The F&O loss cannot be set off against salary, but it can be set off against the interest. That uses Rs 50,000. The remaining Rs 30,000 is carried forward, provided he files ITR-3 by the due date.

When does a tax audit apply?

A tax audit means a Chartered Accountant examines your books and files an audit report before you file the return. For FY 2025-26:

What if you have a loss, low turnover and have never used the presumptive scheme? The common reading is that no audit is needed, but practice is not uniform. Confirm with a CA.

How to report F&O in your return

1. Download the tax profit and loss statement from your broker for 1 April to 31 March.
2. Work out turnover and net profit or loss, with F&O and intraday kept separate.
3. List expenses that relate to trading: brokerage, exchange and SEBI charges, securities transaction tax, data and internet costs.
4. Prepare a profit and loss account and balance sheet. ITR-3 asks for both.
5. Set off the loss against other income except salary, and enter the balance in the carry-forward schedule.
6. File before the due date.

Due dates for FY 2025-26

If no audit applies, the due date was 31 August 2026. In audit cases, the audit report date was reported as extended to 21 October 2026 and the return date to 21 November 2026. A return filed after your date loses the carry forward of this year's loss. More in ITR filing last date and belated return filing.

What changes for tax year 2026-27?

• Higher STT from 1 April 2026: on futures from 0.02% to 0.05%, on option premium from 0.1% to 0.15%, and on exercise of options from 0.125% to 0.15%.
• Audit default: under the 1961 Act, missing a required audit attracts a penalty of 0.5% of turnover, up to Rs 1,50,000 (section 271B). Budget 2026 proposed replacing this with a fixed fee of Rs 75,000 or Rs 1,50,000, based on the delay.
• New Act: the Income-tax Act, 2025 applies with new section numbers. F&O remains business income.

The mistake people usually make

They skip the F&O loss because there is no tax to pay, and file ITR-1 with salary alone. The trades still appear in the Annual Information Statement, and the loss that could have reduced tax in a later profitable year is gone. The other mistake is forgetting advance tax in a year of profit.

Should you do this yourself?

ITR-3 with a balance sheet is harder than a salary return. With a few trades and good records you can manage. With heavy options volume, or an earlier presumptive return, take help.

Frequently asked questions

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