Income Tax on Derivatives Trading

Derivatives—like Futures and Options (F&O)—can be lucrative for traders, but when it comes to taxes, things get a bit technical.

So if you’re wondering “How are F&O profits taxed?”, this guide will walk you through everything:
👉 From how they’re classified, taxed, to which ITR form to use.

📌 Are Derivatives Taxable in India?

Yes, all profits and losses from F&O (Futures & Options) trading are taxable under the Income Tax Act.

But unlike investing in stocks, F&O trades are considered a business activity, not capital gains.

✅ How Derivatives Are Treated Under Income Tax

Trade Type	Classification	Tax Category
F&O (Index or Stock)	Non-speculative business income	Taxed under Business Income

That means you’ll be taxed as a business, and you can also claim expenses like brokerage, internet, rent, or advisory fees.

💰 Tax Rate on F&O Trading Profits

F&O income is added to your total income and taxed according to your individual slab rate:

Annual Income	Tax Rate
Up to ₹2.5 lakh	0% (exempt)
₹2.5 – ₹5 lakh	5%
₹5 – ₹10 lakh	20%
Above ₹10 lakh	30%

🧾 You can deduct expenses like:

• Brokerage fees
• Advisory or software costs
• Demat or internet charges
• Depreciation (if applicable)

🔁 Can I Adjust Losses from Derivatives?

Yes, but here’s how it works:

❌ You cannot set off F&O losses against:

• Salary income
• Lottery or speculation income

✅ You can set off F&O losses against:

• Business income
• Capital gains
• Other income (except salary)

🕐 Carry Forward Rule:
If not fully adjusted in the current year, F&O losses can be carried forward for 8 years, provided you file your return on or before the due date.

📄 ITR Filing Rules for F&O Traders

Requirement	Applicability
ITR Form	ITR-3 (for business income)
Books of Account	Mandatory if income > ₹2.5 lakh
Tax Audit	Required if turnover > ₹1 crore (or ₹10 crore if 95%+ digital transactions)
Presumptive Taxation (44AD)	Allowed for small traders under ₹2 crore turnover, taxed at 6% of turnover

🔍 Audit Tip: If your F&O turnover is high but profit is low, you may still need a tax audit.

🔢 How to Calculate F&O Turnover?

It’s not the total buy/sell value, but the sum of absolute profit and loss (positive and negative) on all F&O trades.

Example:

• Trade 1: ₹5,000 profit
• Trade 2: ₹3,000 loss
  👉 Turnover = ₹5,000 + ₹3,000 = ₹8,000

📊 Example: Tax on Derivative Trading Profit

Case:

• Gross F&O Profit: ₹2.5 lakh
• Salary: ₹6 lakh
• Internet + Broker Expenses: ₹50,000

Computation:

• Total Income = ₹6 lakh (salary) + ₹2.5 lakh (F&O) – ₹50,000 (expenses) = ₹8 lakh
• Tax: As per slab (likely 20%)

⚠️ Important Notes

• F&O is a non-speculative business, not a capital gain
• Always file ITR-3 if you’re into derivatives
• Keep digital records and contract notes for all trades
• Consider advance tax payments if income is large

🎯 Final Takeaway

F&O trading can be profitable—but don’t let tax confusion ruin the gains.

As an F&O trader:

• File returns on time
• Use the correct ITR form
• Claim eligible expenses
• Keep track of turnover to avoid audit issues

FAQs :-

1. Is income from F&O trading taxable?

Yes. F&O profits are taxable under business income and taxed as per the individual’s income tax slab rate.

2. Which ITR form should I use for derivatives trading?

Use ITR-3, since F&O trading is treated as a non-speculative business.

3. Can I carry forward F&O losses?

Yes. You can carry forward F&O losses for up to 8 years, but only if the return is filed on time.

4. Do I need to get a tax audit for F&O trading?

Tax audit is required if turnover exceeds ₹1 crore (or ₹10 crore if 95%+ transactions are digital), or if profits are below the threshold under Section 44AD.

5. Can I claim expenses against my F&O income?

Yes. You can deduct expenses like brokerage, advisory tools, internet, and electricity bills related to your trading activity.

6. How is turnover calculated in F&O trading?

Turnover is the absolute sum of all profit and loss trades, not the trade value.