F&O Taxation: Whether You Make Profit or Loss, Don’t Fail to File Return

Summary: If you have incurred losses in F&O trading, they are classified as non-speculative business losses. The law gives you two major benefits: To avail these benefits, filing of Income Tax Return (ITR) within the due date is mandatory.

When it comes to income tax, most people believe it only matters if they make profits. After all, if you lost money, why would the tax department be interested? But this assumption can land you in trouble if you are into Futures & Options (F&O) trading.

F&O trading is not the same as buying and selling shares casually. The tax department treats it as a business, and whether you make profits or losses, your trades are reported against your PAN and Aadhaar. All these details show up in your Annual Information Statement (AIS), which the Income Tax Department can see. That’s why, even if you’ve lost money, it’s important to file your return and report your F&O activity.

Why F&O Losses Still Matter for Tax

Here’s a reality check: SEBI data shows that 91% of retail traders lose money in F&O. So if you ended the year in losses, you’re not alone. But ignoring those losses is a mistake.

The law gives you a chance to set off and carry forward your losses so they can reduce your tax in future years when you make profits. But the catch is—you only get this benefit if you file your ITR on time.

F&O Income Is Business Income

Under tax rules, F&O income is treated as business income (non-speculative), not capital gains. This means:

• Profits from F&O are taxed like any other business income at your slab rate.
• Expenses related to trading (brokerage, internet, advisory fees, laptop depreciation, etc.) can be claimed as deductions.
• Losses are classified as non-speculative business losses, which have special treatment.

What Happens If You Make a Loss?

Losses in F&O are not wasted—they can work for you later.

1. Set-off in the same year – You can adjust your F&O losses against any other business income (except salary).
2. Carry forward for 8 years – If not fully used in the same year, you can carry forward the remaining loss for up to 8 years and adjust it against future profits.

This is far better than speculative losses (like intraday equity), which can only be set off against speculative profits and carried forward for just 4 years.

But here’s the key point: If you miss the ITR filing deadline, you lose the right to carry forward your F&O losses.

Why You Must File ITR Even Without Profit

Many traders skip filing returns when they’ve lost money, thinking “no tax = no return.” But this is risky because:

• You lose your chance to carry forward losses.
• Your trades are already reported in AIS, so non-reporting may invite notices.
• Depending on your turnover, you might also fall under tax audit rules, even if you made losses.

Turnover Calculation for F&O Traders

For F&O, turnover is not sales or contract value. As per ICAI guidance, it is calculated as:

• The absolute sum of profits and losses (positive and negative differences).
• Add: Premium received in case of options.
• Add: Differences on squared-off or reversed trades.

This turnover figure decides whether a tax audit is required. For instance:

• Tax audit is mandatory if turnover exceeds ₹10 crore.
• It is also required if you declare income below presumptive limits under Section 44AD and your total income crosses the basic exemption limit.

Practical Scenarios

Example 1: Loss Carry Forward
Ravi’s case: He lost ₹4 lakh in F&O this year but filed ITR on time. Next year, he made ₹6 lakh profit. Thanks to timely filing, he can set off last year’s loss and pay tax only on ₹2 lakh.

Example 2: Multi-Year Benefit
Sneha’s case: She lost ₹10 lakh this year but filed ITR. Over the next 3 years, she made ₹2 lakh, ₹5 lakh, and ₹7 lakh profits. She kept adjusting her carried-forward loss until fully used. If she had not filed, she would have had to pay tax on all her profits.

Compliance Checklist for F&O Traders

• Maintain trade records easily accessible through broking apps.
• Calculate turnover correctly using ICAI guidelines.
• Check whether a tax audit is applicable under Section 44AB.
• Pay advance tax if liability exceeds ₹10,000.
• Most importantly—file your ITR before the due date for individuals this year; the last date is September 15 and for individuals with tax audit applicability its October 31.

Final Word

F&O taxation is more detailed than normal stock investing. But here’s the takeaway: even if you lost money, filing your ITR is essential. It secures your right to carry forward losses for up to 8 years, saves future tax, and keeps you compliant.

Losses in trading may be temporary, but missing tax compliance can cause permanent damage. Filing on time ensures that when your profits return, your past losses will work to your benefit.