What is the story about?
With the assessment year (AY) 2026-27 income tax filing season underway, taxpayers who trade in futures and options (F&O) need to pay close attention to how their derivatives transactions are reported in the Income Tax Return (ITR).
Unlike delivery-based equity investments, gains or losses from F&O trading are not taxed under the "Capital Gains" head. Instead, they are treated as business income, which brings a different set of rules relating to return filing, turnover calculation and tax audit requirements.
According to Taxmann's FAQs on ITR filing for AY 2026-27, several taxpayers seek clarity on the taxation of F&O transactions.
Naveen Wadhwa, Vice President, Research and Advisory Division at Taxmann, has explained the applicable provisions, including the treatment of F&O income, turnover computation and audit thresholds.
F&O income is business income
Any profit or loss from F&O trading is taxed under the head "Profits and Gains from Business or Profession." It is treated as non-speculative business income, even though there is no actual delivery of shares.
Since F&O income is classified as business income, traders must calculate their turnover to check whether a tax audit is required.
Filing deadline depends on turnover
The ITR due date for F&O traders depends on whether a tax audit applies.
If turnover crosses the prescribed audit limit, the return must be filed by October 31. If no audit is required, the due date is August 31.
This makes turnover calculation an important step before filing the return.
How is F&O turnover calculated?
The Income-tax Act does not lay down a method for calculating F&O turnover. Taxpayers generally follow the ICAI's Guidance Note on Tax Audit, which is used only to determine whether a tax audit is required—not to calculate taxable income.
Under this method, turnover includes:
The turnover figure decides whether a tax audit is required and, consequently, the applicable ITR filing deadline.
Taxmann also points out that even if an F&O trader incurs a loss and total income is below the basic exemption limit, filing the return on time is important to carry forward the business loss and set it off against eligible business income in future years.
Unlike delivery-based equity investments, gains or losses from F&O trading are not taxed under the "Capital Gains" head. Instead, they are treated as business income, which brings a different set of rules relating to return filing, turnover calculation and tax audit requirements.
According to Taxmann's FAQs on ITR filing for AY 2026-27, several taxpayers seek clarity on the taxation of F&O transactions.
Naveen Wadhwa, Vice President, Research and Advisory Division at Taxmann, has explained the applicable provisions, including the treatment of F&O income, turnover computation and audit thresholds.
F&O income is business income
Any profit or loss from F&O trading is taxed under the head "Profits and Gains from Business or Profession." It is treated as non-speculative business income, even though there is no actual delivery of shares.
Since F&O income is classified as business income, traders must calculate their turnover to check whether a tax audit is required.
Filing deadline depends on turnover
The ITR due date for F&O traders depends on whether a tax audit applies.
If turnover crosses the prescribed audit limit, the return must be filed by October 31. If no audit is required, the due date is August 31.
This makes turnover calculation an important step before filing the return.
How is F&O turnover calculated?
The Income-tax Act does not lay down a method for calculating F&O turnover. Taxpayers generally follow the ICAI's Guidance Note on Tax Audit, which is used only to determine whether a tax audit is required—not to calculate taxable income.
Under this method, turnover includes:
- The total of profits and losses from all squared-off trades.
- Option premiums received, if they have not already been included in the profit or loss.
- Gains or losses from reverse trades.
- Open positions are not counted until they are squared off or settled.
- If a contract is settled through delivery, the price difference is included in turnover. Where the underlying asset is held as stock-in-trade, the full sale value is also counted as business turnover.
The turnover figure decides whether a tax audit is required and, consequently, the applicable ITR filing deadline.
Taxmann also points out that even if an F&O trader incurs a loss and total income is below the basic exemption limit, filing the return on time is important to carry forward the business loss and set it off against eligible business income in future years.
