Income Tax Act 2025: F&O taxation, turnover calculation, loss set-off and carry forward explained

The Income-tax Act, 2025 is in effect since April 1, 2026, and for lakhs of traders and investors one question tops the list: does anything change in how profits from futures and options trading are taxed? The short answer, going by the provisions of the new Act, is that the treatment remains the same. Only the section numbers have changed.

Profits from exchange-traded F&O are generally taxable under the head "Profits and Gains of Business or Profession" as non-speculative business income. "Eligible derivative transactions conducted electronically through a recognised stock exchange are specifically excluded from the definition of a speculative transaction," said CA Dr Suresh Surana. This treatment was contained in section 43(5)(d) of the Income-tax Act, 1961 and, from April 1, 2026, finds place in sections 66(31) and 66(33) of the Income-tax Act, 2025.

The taxable amount is the net F&O profit after deducting eligible business expenses such as brokerage, exchange charges, internet expenses, professional fees and other expenditure incurred wholly and exclusively for the trading activity. The resulting profit is added to the taxpayer's other income and taxed at normal rates, together with surcharge and cess wherever applicable. "It is not taxed at the special rates applicable to short-term or long-term capital gains," said Dr Surana. Individuals and HUFs generally disclose such income in ITR-3.

For instance, if the gross F&O profit is ₹5 lakh and eligible trading expenses are ₹75,000, the net business income taxable would ordinarily be ₹4.25 lakh.

How F&O losses are treated

According to Dr Surana, F&O losses from eligible transactions on a recognised stock exchange are treated as non-speculative business losses, not speculative or capital losses. The following two rules apply for set-off and carry forward of losses:

• Set-off in the same year: The loss may be adjusted against income under any other head, including capital gains, house property income or income from other sources. However, it cannot be set off against salary income, and specific restrictions may apply to certain specially taxed incomes.

• Carry-forward: Any balance left after the current-year set-off may be carried forward for eight tax years under Income-tax Act, 2025. In subsequent years, it can be adjusted only against profits from a business or profession, which need not necessarily be the same F&O activity.

For traders, the timing of the return filing is important here.

"A belated return ordinarily does not preserve the right to carry forward the business loss," said Dr Surana. The loss must be disclosed in the applicable return, generally ITR-3 or ITR-4 for an individual or HUF, and filed within the prescribed due date.

For example, an individual with an F&O loss of ₹3 lakh, interest income of ₹1 lakh and salary income of ₹10 lakh can set off the loss against the interest income but not against the salary. The remaining ₹2 lakh can be carried forward for up to eight years, provided the return is filed on time.

How turnover is calculation for F&O

For tax audit and compliance purposes, turnover matters because it determines whether the audit threshold has been crossed. The methodology is guided by the ICAI Guidance Note on Tax Audit and it is done as follows, according to Dr Surana:

• Aggregate of favourable and unfavourable differences: The absolute value of all profits and losses arising from squared-off derivative transactions should be aggregated while determining turnover.

• Premium on sale of options: Premium received on the sale of options should be included in turnover. However, if such premium has already been considered while computing profit or loss, it should not be included again, so as to avoid double counting.

• Reverse trades: Any gains or losses arising from reverse or offsetting trades should also be considered while calculating turnover.

• Open positions at year-end: In cases where derivative positions remain open as at the end of the financial year, the turnover attributable to such contracts is generally recognised in the year in which the positions are ultimately squared off or settled.

• Delivery-based settlement: Where a derivative contract culminates in delivery, the difference between the trade price and the settlement price is generally considered for turnover purposes. Additionally, where the underlying asset is held as stock-in-trade, the sale value of such asset may also form part of the business turnover of the transferor, as applicable.

In conclusion, for F&O traders, the practical checklist from the new Act is unchanged. One should calculate turnover as per the ICAI guidance, net off eligible expenses, report the result as non-speculative business income in ITR-3, and never miss the due date if the year ends in a loss.