Now a day’s many persons trade in equity and F&O market. Futures and Options (F&O) are derivative instruments traded on stock exchanges. They are hedging instruments and required specials training for trade. In this article we will discuss future & options taxability and accounting. The taxation of F&O transactions in India falls under business income.
To know about the taxability of Future and Options (F&O) transactions as an individual we will have to know more about its turnover calculation, tax audit applicability, and how to report profits or losses in your income tax return. In this article we will explain the process of claiming expenses, loss carry forward, and optimizing tax implications in F&O trading.
Future & Options Taxability
As per income tax act, 1961, the F&O are taxed as follows:
- Nature of Income: F&O transactions are considered non-speculative business income under the Income Tax Act, 1961. This is because they are settled without actual delivery.
- Tax Treatment:
- Profits from F&O trading are added to the total taxable income and taxed as per the applicable income tax slab.
- Losses from F&O trading can be set off against any income except salary income. They can also be carried forward for 8 years and set off against business income.
- Tax Audit Applicability:
- If the total turnover (as per tax calculation) exceeds ₹10 crore, a tax audit is mandatory.
- For traders with a turnover below this threshold, tax audit applicability depends on profit percentage and presumptive taxation rules (Sec 44AB & Sec 44AD).
Calculation of turnover:-
- The absolute sum of realized profits and losses from all trades.
- Premium received on sale of options (since options involve premium payments).
Formula:
Turnover=sum of (Profit from each trade + Loss from each trade) + sum of (Premium received)
Example:
| Trade No. | Buy Price | Sell Price | Profit/Loss | Premium Received |
| 1 | ₹5,000 | ₹7,000 | ₹2,000 (Profit) | ₹10,000 |
| 2 | ₹8,000 | ₹6,500 | ₹1,500 (Loss) | ₹15,000 |
| 3 | ₹10,000 | ₹12,500 | ₹2,500 (Profit) | ₹20,000 |
Turnover Calculation: Total of Profit/loss and Premium received
= (2,000+1,500+2,500) + (10,000+15,000+20,000)
= 6,000+45,000
= ₹51,000
Tax Audit Applicability for Futures & Options (F&O) Trading
Tax audit requirements in F&O trading are determined by turnover, profit percentage, and method of taxation under Section 44AB of the Income Tax Act. Tax audit applicability is explained below with examples:-
Case 1: If turnover exceeds above ₹10 Crore
If total turnover exceeds ₹10 crore, a tax audit is mandatory, regardless of profit or loss.
This applies to traders using 100% digital transactions (i.e., bank transfers, UPI, etc.)
- Most F&O traders deal in digital transactions (bank transfers, UPI, net banking, etc.).
- If total cash receipts + cash payments do not exceed 5% of total turnover, then the tax audit limit is ₹10 crore instead of ₹1 crore.
Example:
Turnover: ₹12 crore
Profit: ₹50 lakh (or loss)
Tax Audit Required? YeS
Example: When 5% Cash Condition is Met
| Transaction Type | Amount (₹) | Percentage |
| Total Turnover (F&O Trading) | ₹4.5 crore | 100% |
| Total Cash Transactions (Deposits & Withdrawals) | ₹20 lakh | 4.44% (Less than 5%) |
| Digital Transactions (Online, Bank, UPI, etc.) | ₹4.3 crore | 95.56% |
Since cash transactions are less than 5%, the tax audit threshold is ₹10 crore, so no audit required!
Example: When 5% Cash Condition is NOT Met
| Transaction Type | Amount (₹) | Percentage |
| Total Turnover (F&O Trading) | ₹2.5 crore | 100% |
| Total Cash Transactions (Deposits & Withdrawals) | ₹20 lakh | 8% (More than 5%) |
| Digital Transactions (Online, Bank, UPI, etc.) | ₹2.3 crore | 92% |
Since cash transactions exceed 5%, the tax audit limit remains ₹1 crore.
Since turnover is ₹2.5 crore (above ₹1 crore), tax audit is required under Section 44AB(a).
Important Points to Remember
✔️ If cash transactions are 5% or less of total turnover, the tax audit threshold increases to ₹10 crore.
✔️ If cash transactions exceed 5%, the tax audit limit remains ₹1 crore.
✔️ Since most F&O traders operate digitally, they can benefit from the ₹10 crore limit.
✔️ If turnover is below ₹1 crore, tax audit is usually NOT required unless opting out of Section 44AD.
Case 2: Turnover Below ₹2 Crore (Presumptive Taxation)
If turnover is below ₹2 crore, traders can opt for presumptive taxation (Sec 44AD) and declare at least 6% of turnover as profit (if all transactions are digital).
No tax audit required if this condition is met.
If the trader declares lower profit (less than 6% of turnover), a tax audit is mandatory.
Example 1:
Turnover: ₹1.5 crore
Profit Declared: ₹10 lakh (which is >6%)
Tax Audit Required? No
Example 2:
Turnover: ₹1.5 crore
Profit Declared: ₹5 lakh (which is <6%)
Tax Audit Required? ✅ Yes
Case 3: Turnover Between ₹2 Crore and ₹10 Crore
If turnover is between ₹2 crore and ₹10 crore, the trader cannot use the presumptive taxation scheme (Sec 44AD).
A tax audit is required only if profit is below 6% of turnover or if a loss is reported.
Example 1:
Turnover: ₹3 crore
Profit Declared: ₹30 lakh (which is 10%)
Tax Audit Required? No
Example 2:
Turnover: ₹3 crore
Profit Declared: ₹10 lakh (which is 3%)
Tax Audit Required? Yes
Case 4: Reporting Loss in F&O Trading
If a trader incurs a loss in F&O, a tax audit is required if turnover exceeds ₹2 crore.
If turnover is below ₹2 crore, a tax audit is required only if the trader wants to carry forward losses.
Example:
Turnover: ₹80 lakh
Loss: ₹10 lakh
Tax Audit Required?
If the trader does not want to carry forward the loss → No audit
If the trader wants to carry forward the loss → Yes, audit required
Summary Table for Tax Audit Applicability
| Turnover | Profit ≥ 6% of Turnover | Profit < 6% of Turnover / Loss | Tax Audit Required? |
| <₹2crore | No Audit (Sec 44AD) | Audit Required if loss carried forward | ✅ Sometimes |
| ₹2crore-₹10crore | No Audit | Audit Required | ✅ If profit <6% |
| >₹10crore | Audit Required | Audit Required | ✅ Always |
Accounting for Futures & Options (F&O) Trading
F&O trading is considered business income, so traders need to maintain proper books of accounts for taxation and compliance. Below is a detailed explanation of accounting methods, turnover calculation, expenses, and profit/loss treatment.
1. Key Aspects of F&O Accounting
- F&O Trading is Treated as Business Activity
- Unlike stock investments, which are capital gains, F&O trading is business income under the Income Tax Act.
- Traders must prepare profit & loss (P&L) account and balance sheet for tax filing.
- Books of Accounts Required
- Ledger Statements from the broker (transaction-wise details).
- Profit & Loss Statement (to calculate taxable income).
- Balance Sheet (showing assets, liabilities, and capital).
- Bank Statements (to verify cash flow and expenses).
- Method of Accounting
- Mercantile (Accrual) Accounting – Recommended, where income and expenses are recorded when incurred (not when paid).
- Cash Accounting – Allowed for small traders, but accrual is preferred for audit compliance.
2. Turnover Calculation in Accounting
Turnover is calculated to determine tax audit applicability.
- Futures (Equity & Commodity)
- Turnover = Absolute sum of realized profits and losses
- Example:
- Profit = ₹30,000
- Loss = ₹20,000
- Turnover = ₹30,000 + ₹20,000 = ₹50,000
- Options (Equity & Commodity)
- Turnover = Absolute sum of profits & losses + Premium received on selling options
- Example:
- Profit = ₹40,000
- Loss = ₹25,000
- Premium received = ₹60,000
- Turnover = ₹40,000 + ₹25,000 + ₹60,000 = ₹1,25,000
3. Profit & Loss Accounting in F&O Trading
Traders should prepare a Profit & Loss Account to determine taxable income.
Example of P&L Statement for F&O Trading
| Particulars | Amount (₹) |
| Income from F&O Trading | |
| Profit from Futures Trading | 1,00,000 |
| Profit from Options Trading | 50,000 |
| Total Trading Income | 1,50,000 |
| Less: Expenses | |
| Brokerage Charges | 5,000 |
| Internet & Software Costs | 3,000 |
| Advisory/Research Fees | 2,000 |
| Electricity & Office Rent | 10,000 |
| Net Profit Before Tax | 1,30,000 |
🔹 Tax Treatment: Net Profit (₹1,30,000) is added to total taxable income and taxed as per the applicable slab.
4. Expenses Allowed as Deductions
Since F&O trading is treated as a business, expenses incurred for trading are deductible, reducing taxable income.
✅ Allowed Expenses:
- Brokerage Fees & Exchange Charges
- STT (Securities Transaction Tax) – Not Deductible, but included in turnover
- Internet, Software, and Data Feed Expenses
- Advisory or Research Fees
- Office Rent & Electricity
- Depreciation on Computer & Trading Equipment
🚫 Not Allowed as Deduction:
- Personal Expenses
- Penalty/Fine Paid to SEBI or Brokers
5. Mark-to-Market (MTM) Accounting for Open Positions
- In trading, unrealized profits/losses from open positions are not taxed until the position is closed.
- Example: If an open future trade shows a ₹10,000 gain but is not squared off, it is only accounted as MTM profit but is not taxable.
- When the trade is closed, the final profit/loss is accounted in the P&L statement.
6. Balance Sheet Representation in F&O Accounting
| Liabilities | Amount (₹) | Assets | Amount (₹) |
| Capital (Own Funds) | 5,00,000 | Cash/Bank Balance | 2,00,000 |
| Retained Earnings (Past Profits) | 1,50,000 | Trading Account Margin | 2,50,000 |
| Current Year Profit | 1,30,000 | Other Assets | 1,30,000 |
| Total Liabilities | 7,80,000 | Total Assets | 7,80,000 |
7. Tax Implications & ITR Filing
- ITR Form: Traders must file ITR-3 (for business income).
- Advance Tax:
- If tax liability exceeds ₹10,000 in a financial year, advance tax payments are required in four installments (June 15, Sep 15, Dec 15, March 15).
- GST Applicability: No GST is applicable on F&O trading as it is a financial transaction.
Here are detailed answers to the most commonly asked questions related to Futures & Options (F&O) Taxability and Accounting:
1. Turnover & Tax Audit
✅ Q: My F&O turnover is below ₹2 crore, but I have a loss. Do I still need a tax audit?
A: It depends:
- If you don’t want to carry forward the loss, a tax audit is not required.
- If you want to carry forward the loss, a tax audit is required under Section 44AB.
✅ Q: If my turnover is above ₹10 crore but I use only digital transactions, do I need a tax audit?
A: Yes, tax audit is mandatory for turnover above ₹10 crore, even if all transactions are digital.
✅ Q: Can I use presumptive taxation (44AD) for F&O trading?
A: No, presumptive taxation under Section 44AD is not applicable for F&O trading because it falls under non-speculative business income. You must report actual profits and losses.
2. Taxation & ITR Filing
✅ Q: Do I need to file ITR-3 or ITR-4 for F&O trading?
A: You must file ITR-3 because F&O trading is treated as business income. ITR-4 is for presumptive taxation, which is not applicable for F&O.
✅ Q: How are F&O losses treated? Can I carry them forward?
A: Yes, F&O losses can be carried forward:
- Losses can be set off against any business income (except salary).
- Can be carried forward for 8 years but must be set off only against business income in future years.
✅ Q: If I have salary income and F&O trading, how should I file my tax return?
A:
- You should combine both incomes in ITR-3.
- Salary income is taxed as per slabs.
- F&O profits are added to total income.
- If there is a loss, it can be adjusted against business income but not against salary.
✅ Q: What is the advance tax requirement for F&O traders?
A: If your total tax liability exceeds ₹10,000 in a financial year, you must pay advance tax in the following schedule:
- 15th June – 15% of total estimated tax
- 15th September – 45% of total tax
- 15th December – 75% of total tax
- 15th March – 100% of total tax
3. Accounting & Compliance
✅ Q: Do I need to maintain books of accounts for F&O trading?
A: Yes, if:
- Turnover exceeds ₹25 lakh, or
- Profit is less than 6% of turnover or if losses are reported.
You should maintain:
- Profit & Loss Account
- Balance Sheet
- Broker statements
- Expense records
✅ Q: How do I account for open F&O positions at year-end?
A:
- Unrealized gains or losses are recorded under Mark-to-Market (MTM) accounting but are not taxed until realized.
- Once closed, the profit/loss is booked in the Profit & Loss account.
✅ Q: What expenses can I deduct from my F&O income?
A: You can deduct:
- Brokerage & Exchange Charges
- Internet & Software Costs
- Advisory/Research Fees
- Office Rent & Electricity
- Depreciation on Laptop/Computer used for trading
✅ Q: Does STT (Securities Transaction Tax) count as a deductible expense?
A: No, STT is not allowed as a deductible business expense under Section 40(a)(ib).
4. GST & Other Regulations
✅ Q: Is GST applicable to F&O trading?
A: No, GST is not applicable on F&O trading because it falls under financial services and is exempt from GST.
✅ Q: If I trade in both stocks and F&O, how should I report income separately?
A:
- Short-term & long-term stock investments → Taxed under capital gains.
- F&O trading → Taxed as business income.
- Both must be separately disclosed in ITR-3.
Final Summary of Key Points- Future & Options Taxability
| Topic | Details |
| Tax Treatment | F&O trading is business income, not capital gains. |
| Turnover Calculation | Absolute sum of profits/losses + premium received (for options). |
| Tax Audit Required? | If turnover > ₹10 crore OR if profit < 6% of turnover. |
| ITR Form to File | ITR-3 (since it’s business income). |
| Set Off & Carry Forward Losses | Losses can be set off against business income and carried forward for 8 years. |
| Advance Tax | Required if tax liability exceeds ₹10,000 per year. |
| Deductible Expenses | Brokerage, Internet, Software, Advisory, Office Rent, etc. |
| GST on F&O? | Not applicable to trading. |