Profit from F&O is business income, not capital gains. Intraday equity profit is also business income, but of a separate kind called speculative business income. Both are taxed at your slab rate. Both go in ITR-3. The number that decides your compliance load is not your profit. It is your turnover, and turnover in F&O is not the value of your trades.
Tax audit starts at ₹1 crore of turnover. It moves to ₹10 crore if cash receipts and cash payments each stay under 5% of the total. Source: section 44AB(a), Income-tax Act, 1961, as reproduced in the ICAI Guidance Note on Tax Audit (Revised 2025).
How are F&O and intraday income taxed?
| Rule or limit | Figure | Applies to | Statutory source |
|---|---|---|---|
| Head of income | Business income, non-speculative | Exchange-traded F&O | Section 43(5), proviso (d) |
| Head of income | Business income, speculative | Intraday equity, settled without delivery | Section 43(5) |
| Tax rate | Your slab rate | Both | Chapter II, Finance Act |
| Turnover, F&O | Sum of favourable and unfavourable differences, plus premium received on sale of options | Squared-off derivative trades | ICAI Guidance Note, para 5.11(b) |
| Turnover, intraday | Aggregate of favourable and unfavourable differences | Speculative trades | ICAI Guidance Note, para 5.11(a) |
| Tax audit threshold | ₹1 crore, or ₹10 crore if cash stays under 5% | Business turnover | Section 44AB(a) |
| Presumptive scheme cap | ₹2 crore, or ₹3 crore if cash receipts stay under 5% | Eligible resident individuals and firms | Section 44AD |
| Presumptive rate | 8% of turnover, or 6% on digitally received turnover | Section 44AD filers | Section 44AD(1) |
| Penalty for skipping audit | 0.5% of turnover or ₹1,50,000, whichever is lower | Failure under 44AB | Section 271B |
| Advance tax | 15%, 45%, 75% and 100% by 15 June, 15 Sep, 15 Dec and 15 Mar | Anyone with tax over the threshold | Sections 208–211 |
Why is F&O not speculative but intraday is?
Because the law carved out an exception. Section 43(5) defines a speculative transaction as one settled without actual delivery. Intraday equity fits that exactly.
Proviso (d) then removes derivatives from the definition. It excludes “an eligible transaction in respect of trading in derivatives … carried out in a recognised stock exchange”. So F&O on NSE or BSE is ordinary business income.
The difference matters for losses. Speculative loss can be set off only against speculative profit, under section 73(1). Ordinary business loss is far more flexible. The carry-forward periods also differ, under sections 72 and 73(4). Check the current number of years before you plan a set-off.
How do you compute F&O turnover?
Add the absolute value of every profit and every loss. A ₹40,000 gain and a ₹30,000 loss make ₹70,000 of turnover, not ₹10,000. Contract value is irrelevant.
Options are where people go wrong. The ICAI Guidance Note (Revised 2025) states that “premium received on sale of options is also to be included in turnover”. One carve-out follows. Where the premium already sits inside the net profit on the trade, that net profit is not counted again.
Be aware that this is contested. Several broker help pages tell option sellers to leave the premium out. They cite an earlier edition of the same guidance. The 2025 edition, as published, includes it. Including it makes your turnover larger. The safe course is to work out both figures. Then you know which side of ₹1 crore you sit on.
The Guidance Note is explicit that this method is only for testing whether section 44AB applies. It does not change how your income is computed.
When do you need a tax audit?
Turnover alone does not decide it. Three routes lead to an audit.
The first is turnover above ₹1 crore. That rises to ₹10 crore in one case. Cash receipts must stay under 5% of receipts. Cash payments must stay under 5% of payments. Trading through a bank account and a broker means almost everyone qualifies for the higher limit.
The second is section 44AD. Say you once declared income under it. If you then show a lower profit within the next five years, an audit can follow. That happens even at a small turnover. Read how presumptive taxation works before opting in, because opting out again has consequences.
The third is a loss. Declaring a loss while your income crosses the basic exemption limit generally puts you in audit territory. Many traders quietly skip this. The penalty under section 271B is 0.5% of turnover or ₹1,50,000, whichever is lower.
What can you deduct against F&O income?
This is the advantage of business treatment. You may claim the costs of running the activity:
- Brokerage, exchange charges and the GST on them
- Securities transaction tax
- Internet and phone bills
- Data and advisory subscriptions
- Depreciation on the computer you trade from
- Interest on money borrowed for the business
Keep the evidence. A broker’s contract note and annual statement do most of the work. Where an expense is shared with personal use, claim only the business share and record the basis.
Note also that these deductions run under the head of business income. That is separate from the regime question, which affects your slab deductions. See old versus new regime.
Do not forget advance tax
Business income carries no TDS to cover your liability. You must pay advance tax yourself, in four instalments. They are 15% by 15 June, 45% by 15 September, 75% by 15 December and 100% by 15 March. Interest runs under sections 234B and 234C when you fall short.
Trading profit arrives unevenly, so estimate after each quarter rather than in March. Use the advance tax calculator and read how the instalments work.
Frequently asked questions
Which ITR form do I file for F&O income?
ITR-3, because F&O is business income. You cannot use ITR-1 or ITR-2. Say you also hold shares as an investor. Those capital gains go in the same return, under a different head. Keep the two activities separately recorded, since the classification is fact-specific.
Can I set off F&O losses against my salary?
No. Business loss cannot be set off against salary income. It can be set off against other heads in the same year, such as house property or other sources. Chapter VI sets the rules. What is left can be carried forward against future business profit. Intraday loss is narrower still, and sets off only against speculative profit under section 73(1).
Is turnover the same as the value of my contracts?
No, and this is the most common error. Turnover for section 44AB is the sum of the differences, plus option sale premium under the 2025 Guidance Note. A trader with ₹40 crore of contract value may have turnover well under ₹1 crore. Your broker’s tax profit and loss statement usually reports both figures.
Can I use section 44AD and declare 6% of turnover?
Only if you are eligible and within the cap. That cap is ₹2 crore, or ₹3 crore where cash receipts stay under 5%. The presumptive figure is the higher of 8% of turnover, or 6% on turnover received digitally, or your actual profit. If your real profit is lower than that, declaring it means facing the audit and record-keeping rules instead.
Is STT deductible?
Yes, where the income is taxed as business income. Securities transaction tax paid on F&O and intraday trades is an allowable business expense. An investor reporting capital gains cannot claim it. That is one more reason the head of income matters. See capital gains tax for that side.
Sources
- ICAI, Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2025) — paras 5.11, 8.2, 62.8 and the section 44AB text. icai.org
- Advance tax instalment schedule and ITR due dates as held in our tax data, financial year 2026-27.
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