Taxation on Stocks & F&O

Getting that classification right is the whole game. Everything else on this page follows from which box your activity falls into.

How are stocks and derivatives taxed in India?

Source: Credsir tax dataset, drawn from the Income-tax Act, 1961, as of 17 August 2026. Health and education cess of 4% applies on top of the tax, and surcharge applies at higher incomes.

Note the asymmetry in the first two rows. Short-term equity gains are taxed at 20% while long-term gains are taxed at 12.5%. Indexation is not available on either.

Why does F&O count as business income?

Because the law treats a derivative trade on a recognised stock exchange as a business transaction, not an investment. It is specifically excluded from being speculative, which is why F&O is called non-speculative business income.

Intraday equity is the opposite. No delivery is taken, so it is speculative business income. The two sit in different boxes and their losses do not mix freely.

The practical effect is large. As business income, you can deduct the costs of earning it. Brokerage, exchange charges, demat fees and internet all qualify. So does depreciation on a computer, and a share of rent for a dedicated space. A capital gains investor cannot deduct any of that.

You also file a different return. Business income means ITR-3 rather than the simpler forms. Our page on which ITR form applies sets out the choice.

What are the audit thresholds for a trader?

Section 44AB of the Income-tax Act, 1961 requires a tax audit where business turnover exceeds ₹1,00,00,000. That threshold rises to ₹10,00,00,000 where cash receipts and cash payments each stay within 5% of the totals.

Almost every trader clears the digital test, because trading settles through a bank. So the working threshold for most traders is ₹10 crore, not ₹1 crore. For professionals the limit is ₹50,00,000 of gross receipts.

Turnover for F&O is not the notional contract value. It is computed from the trades themselves, and the method matters enormously to whether you cross a threshold. Get this computed by someone who does it regularly rather than assuming.

Presumptive taxation under Section 44AD is the other route, and it interacts with the audit rules. See presumptive taxation before choosing.

How do losses work?

This is where the classification pays for itself. A speculative loss, from intraday trading, can only be set off against speculative income. It cannot touch your salary, your F&O profit or your capital gains.

A non-speculative business loss, from F&O, is treated more generously. It can be set off against most other income in the same year, though not against salary.

Capital losses are separate again. Short-term capital losses can be set off against both short-term and long-term capital gains. Long-term capital losses can only be set off against long-term gains.

To carry any loss forward, you must file your return by the due date. Miss the deadline and the carry-forward is gone. The due dates are on our ITR due dates page.

The advance tax problem traders ignore

Trading income has no employer deducting TDS. So the tax is your job, in instalments, through the year. Miss the instalments and interest accrues under the advance tax provisions.

A profitable F&O year followed by an unplanned March tax bill plus interest is a common and avoidable outcome. Estimate quarterly and pay. Our advance tax guide and the advance tax calculator handle the arithmetic.

Reconcile against Form 26AS and the annual information statement before filing. Broker data now flows to the department directly, and mismatches trigger notices. See responding to income tax notices.