F&O trading losses: how they are taxed, whether you can set them off against salary, and what June 15 means for traders

For informational purposes only. F&O tax treatment is complex — consult a practising CA who handles trader taxation before filing. Rules have technical nuances that depend on your specific facts.

Most F&O (Futures and Options) traders focus on their trading P&L. Few understand the tax and compliance implications — which are significantly more complex than for equity investors, and which can result in tax notices, penalties, and mandatory audits if handled incorrectly.

Today (June 15) is the first advance tax instalment deadline for FY 2026-27. If you trade F&O and expect profits, you are required to pay 15% of your estimated annual tax by today. Missing this instalment attracts 1% interest per month on the shortfall under Section 234C.

The most important fact: F&O income is business income

Gains and losses from F&O trading are not capital gains. They are treated as business income under "Profits and Gains of Business or Profession" (PGBP) — specifically non-speculative business income.

This has several major implications:

The SEBI data: what most F&O traders actually experience

Before the tax discussion, context: SEBI's FY 2023-24 study of active F&O traders found that 93% of individual F&O traders lost money in that year. The median loss was approximately ₹1.1 lakh per trader. Only 1% of active traders earned more than ₹1 lakh in profit over a 3-year period.

This matters for the tax discussion because most F&O traders are not paying tax on profits — they are asking whether they can use F&O losses to reduce their total tax bill.

Source: SEBI study on F&O traders, SEBI.gov.in

Can F&O losses offset salary income? No.

This is the most common misunderstanding.

What you can do with F&O losses:

• Set off against other business income in the same year (e.g., freelance income, rental income treated as business income)
• Carry forward for 8 years and set off against future F&O or business profits

What you cannot do:

• Set off F&O losses against salary income
• Set off F&O losses against interest income, rental income (taxed as house property income), or capital gains

The practical consequence: A salaried employee who trades F&O and makes ₹3 lakh in F&O losses cannot use those losses to reduce their ₹15 lakh salary tax. The losses exist in a separate income head. They can only be applied against future F&O profits.

What counts as F&O "turnover" for tax purposes

Calculating F&O turnover (which determines whether an audit is required) is different from total traded value.

F&O turnover = absolute value of all profits and losses on each trade, summed

Example: You enter 4 trades:

• Trade 1: ₹5,000 profit
• Trade 2: ₹3,000 loss
• Trade 3: ₹8,000 profit
• Trade 4: ₹2,000 loss

Turnover = ₹5,000 + ₹3,000 + ₹8,000 + ₹2,000 = ₹18,000 (not ₹18,000 worth of contracts traded)

This is important because the audit threshold is based on this "absolute profit/loss" turnover, not face value of contracts.

When a tax audit is mandatory

A tax audit by a chartered accountant is required if:

• F&O turnover (as defined above) exceeds ₹1 crore in the year (threshold raised to ₹10 crore for taxpayers where 95%+ receipts and payments are digital — which most online F&O traders qualify for)
• And the declared profit is less than 6% of turnover (for digital transactions)

If your F&O turnover is below ₹1 crore (or ₹10 crore for digital), no audit is required.

If your declared profit exceeds 6% of turnover (i.e., you claim "presumptive taxation" under Section 44AD if eligible), audit is not required but you must declare at least 6% of turnover as profit.

Important: Section 44AD (presumptive taxation) is a simplified option for small businesses — some traders use it to avoid the complexity of maintaining full books. However, if you use 44AD for F&O, you cannot carry forward F&O losses. And 44AD eligibility for F&O is technically debatable — consult a CA.

Business expenses you can deduct from F&O income

Because F&O is business income, genuine trading expenses are deductible:

• Brokerage and transaction charges
• SEBI regulatory fees (STT, exchange charges, stamp duty)
• Software subscriptions for charting/analysis tools
• Advisory or signal subscription fees
• Internet and phone charges (proportionate to business use)
• Dedicated workstation or hardware (proportionate depreciation)

Keep receipts and invoices for all claimed deductions. In a tax notice or audit, you will need to prove these were genuine business expenses.

Filing requirements for salaried F&O traders

If you are salaried and also trade F&O:

• You must file ITR-3 (even if your F&O turnover is ₹0 and you had only losses)
• You need a profit and loss statement for F&O trades — your broker provides this (typically available in the tax P&L report section of your trading platform: Zerodha, Groww, Angel One)
• You may need to maintain books of accounts depending on turnover and profit thresholds
• Your employer issues Form 16 for salary TDS — the F&O income/loss is declared separately in ITR-3

Your chartered accountant (if you use one for ITR) must be familiar with trader taxation specifically — it is a specialised area that general tax practitioners sometimes mishandle.

Advance tax for F&O traders: June 15 deadline

F&O income is not covered by TDS (no tax is deducted at source on trading profits). If your estimated F&O profits for FY 2026-27 are likely to generate tax above ₹10,000 after accounting for other TDS and advance tax paid, you must pay quarterly advance tax.

FY 2026-27 advance tax schedule:

• June 15: 15% of estimated annual tax
• September 15: 45% cumulative
• December 15: 75% cumulative
• March 15: 100%

If your F&O trading is showing consistent profits and you haven't paid advance tax today, pay now to stop interest from accruing under Section 234C.

Bottom line

• F&O income is non-speculative business income — taxed at slab rate, file ITR-3
• F&O losses cannot be set off against salary income; they carry forward 8 years against future business profits
• F&O turnover = absolute value of profits and losses on individual trades (not face value of contracts)
• Tax audit required if turnover exceeds ₹10 crore (digital) and declared profit is below 6% of turnover
• Business expenses (brokerage, software, advisory) are deductible from F&O income
• Advance tax instalments are mandatory for F&O traders — June 15 first instalment is today

Frequently asked questions

Q: I made ₹5,000 profit from F&O this year. Do I still need to file ITR-3?

A: Yes. Any F&O transaction — profit or loss — requires ITR-3. Filing ITR-1 or ITR-2 when you have F&O transactions is incorrect and can result in a defective return notice.

Q: My F&O broker's tax P&L shows different numbers from what I calculate. Which do I use?

A: Your broker's tax P&L report is the primary reference for F&O profit/loss. Cross-check it against your ledger. Discrepancies usually arise from different accounting of premium received/paid on options (options sellers must account for premium received as turnover in some interpretations). A CA specialising in trader taxation can resolve this.

Q: I lost ₹8 lakh in F&O last year and want to claim it against my salary. Can I?

A: No — F&O losses cannot be set off against salary. However, carry the loss forward in your ITR. If you generate F&O profits in any of the next 8 years, those carried-forward losses offset the future profits and reduce tax at that time. File ITR-3 even for a loss year to officially record the carry-forward.

Sources: SEBI study on F&O traders (FY 2023-24) · F&O taxation, ClearTax

Last verified: June 2026. F&O tax treatment involves technical nuances — consult a CA familiar with trader taxation.