F&O and Intraday Trading

Trading in futures and options, or buying and selling shares within the day, does not produce capital gains. Both are business, but the Act treats them differently. F&O on a recognised exchange is ordinary business, and a loss on it can be set off widely and carried forward for eight years. Intraday equity trading is speculation, and its loss is confined to speculative profits for four years. Both need ITR-3. Both raise a question the Act does not answer: what “turnover” is for the tax audit. This guide sets out the classification, the treatment of losses, the return, and the audit link, under both Acts.

Which Act applies

• Trades up to 31 March 2026 (financial year 2025-26, assessment year 2026-27) are governed by the Income-tax Act, 1961.
• Trades from 1 April 2026 (tax year 2026-27) are governed by the Income-tax Act, 2025 (section 536 is the repeal and savings provision).

Speculative or not: section 43(5), now section 66(31)

A “speculative transaction” is a contract for the purchase or sale of any commodity, “including stocks and shares”, that “is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips” (section 43(5); section 66(31)).

Intraday equity trades are bought and sold the same day and settled without delivery. They fall within the definition and are speculative.

F&O trades would fall within it too, but proviso (d) to section 43(5) takes out “an eligible transaction in respect of trading in derivatives … carried out in a recognised stock exchange”. Under Explanation 1, an eligible transaction is one that is:

• carried out electronically on screen-based systems through a SEBI-registered stock broker or other intermediary; and
• “supported by a time stamped contract note” showing the client’s unique client identity number and PAN.

Section 66(31)(a) and (33) of the 2025 Act carry the same exclusion as a “specified derivative transaction”, with the same conditions. Exchange-traded F&O through a registered broker is therefore non-speculative business income.

Proviso (b) separately excludes hedging contracts entered into by “a dealer or investor” in shares “to guard against loss in his holdings” (section 66(31)©).

Separate businesses. Where speculative transactions amount to a business, that speculation business “shall be deemed to be distinct and separate from any other business” (Explanation 2 to section 28; section 26(3)). A person who trades both intraday and F&O has two businesses, and the profit or loss of each is computed separately.

Delivery-based share trading is not speculative. Whether it is business or investment depends on the facts; see Capital Gains on Listed Shares and Equity Funds.

Computing the income

Both are taxed under “Profits and gains of business or profession” at the person’s normal rates. Neither section 111A nor section 112A applies. Expenses incurred for the business, such as brokerage, exchange charges, advisory subscriptions and internet costs, are deductible on ordinary principles.

STT is deductible here. Section 36(1)(xv) allows securities transaction tax paid on transactions whose income is included under business income. The 2025 Act counterpart is section 32(k). This is the opposite of the capital gains rule, where STT is not deductible.

STT rates from 1 April 2026. Section 159 of the Finance Act, 2026 amended section 98 of the Finance (No. 2) Act, 2004. NSE Circular No. 02/2026 (31 March 2026) applies the new rates to trades executed on or after 1 April 2026:

Transaction	Up to 31 March 2026	From 1 April 2026
Sale of an option	0.1 per cent	0.15 per cent
Sale of an option, where exercised	0.125 per cent	0.15 per cent
Sale of a future	0.02 per cent	0.05 per cent

Losses

	F&O (non-speculative)	Intraday (speculative)
Same-year set-off	Against any other business income and other heads, but not salary (section 71(2A); section 109(1)(a))	Only against profits of another speculation business (section 73(1); section 113(1))
Carry forward	Eight years, against business income (section 72; section 112)	Four years, against speculation profits only (section 73(4); section 113(3))

A loss is carried forward only if it was determined in a return filed by the due date (section 80; section 121). Losses carried from 1961 Act years continue under section 536(2)(m) of the 2025 Act, in the manner provided in sections 72 and 73 of the 1961 Act.

Turnover, books and the tax audit

The audit threshold. A person carrying on business needs a tax audit if turnover exceeds Rs 1 crore. The limit is Rs 10 crore where cash receipts and cash payments are each within 5 per cent (section 44AB; section 63). F&O and intraday trades are settled through the bank, so the cash conditions usually decide which limit applies. The thresholds, the forms and the presumptive-scheme cases are in The Tax Audit: Thresholds and Due Dates. Books of account are in Books of Account.

What “turnover” means for trading. Neither Act defines turnover for derivatives or speculation. The figure in common use comes from the ICAI’s Guidance Note on Tax Audit under Section 44AB (Revised 2025, para 5.11). The Guidance Note states that its method is “only and only for the purpose of computing ‘turnover’ for tax audit”. It does not change whether income is capital gains or business income. In summary, the Guidance Note treats:

• Speculative transactions: the aggregate of favourable and unfavourable differences on settlement. Each settled contract is a separate transaction, so profits and losses are added, not netted.
• Derivatives:
  • for squared-off trades, the total of favourable and unfavourable differences;
  • premium received on the sale of options, unless it is already in the net profit figure;
  • differences on reverse trades;
  • open positions at year-end, counted in the year in which they are squared off;
  • delivery-settled derivatives, the difference between trade and settlement price.
• Delivery-based trades: the total value of sales.

The contract value of a futures or options position is not turnover under this method. The figure is the Guidance Note’s, not the Act’s, and an Assessing Officer is not bound by it. Tribunals have generally accepted it. In Sahil Gupta v. DCIT (ITAT Delhi, ITA No. 1708/Del/2025, 29 August 2025), the facts were these:

• for AY 2022-23, the Assessing Officer took the full value of the assessee’s F&O trades, Rs 55.65 crore, as turnover;
• the assessee had computed F&O turnover of Rs 29,28,652 and speculative turnover of Rs 2,87,421 on the Guidance Note method; and
• the Assessing Officer levied a penalty of Rs 25,000 under section 271A for not maintaining books.

The Tribunal set out paras 5.14(b) of the 2022 and 5.10(b) of the 2023 editions. It held that being guided by the ICAI method was reasonable cause, and deleted the penalty. The assessee was not represented, and the decision is on penalty, not on the meaning of turnover in the Act.

The presumptive scheme. Whether F&O income can be declared under section 44AD, and what happens on leaving that scheme, are covered in Presumptive Taxation for Small Business.

The return: ITR-3

An individual or HUF with business income files ITR-3, not ITR-2. In the ITR-3 notified for AY 2026-27 (Notification No. 47/2026, Income-tax (Fourth Amendment) Rules, 2026), the trading account has four separate lines:

• 12a “Turnover from Intraday Trading”;
• 12b “Income from Intraday Trading - transferred to Profit and Loss account”;
• 12c “Turnover from Futures & Options Trading”; and
• 12d “Income from Futures & Options Trading - transferred to Profit and Loss account”.

Where regular books are not maintained, item 65 of Part A-P&L asks for “Turnover from speculative activity”, gross profit, expenditure and net income. Schedule BP then computes speculative income separately (items 39 to 42). A speculative loss goes to Schedule CFL. Part A-OI, and the general questions on audit under section 44AB, follow from the turnover figure.

A worked filing is in How to file ITR-3 with salary and an intraday speculative loss. From tax year 2026-27 the return is filed under section 263 in the form notified for that year.

What to have ready

• The broker’s tax P&L or global statement for the year, split into intraday, F&O and delivery trades, with turnover computed on the Guidance Note method. This comes from the broker.
• Contract notes and the ledger, for charges, STT and the year-end open positions.
• Bank statements for pay-ins and pay-outs, and any cash receipts or payments (for the 5 per cent test).
• Expense records claimed against trading income.
• Brought-forward business and speculation losses, by year, from last year’s Schedule CFL.
• The audit report, where an audit applies, before the return is filed.

Due dates, verification, interest and corrections

• Due dates for AY 2026-27.
  • A trader not required to be audited files by 31 August 2026.
  • One required to be audited files the audit report by 21 October 2026 and the return by 21 November 2026, under CBDT Circular No. 07/2026 (see The Tax Audit).
  • After the due date, a belated return is possible but losses cannot be carried forward (see Belated and Revised Returns).
• Verification. The return is verified electronically or by a signed ITR-V, within the time allowed (see E-Verifying a Return). The audit report itself is uploaded by the auditor and accepted by the taxpayer on the portal, as described in The Tax Audit.
• Advance tax. Trading profit is subject to advance tax. Shortfalls attract interest under sections 234B and 234C (see Advance Tax and Self-Assessment Tax).
• Default. Failure to get accounts audited is penalised under section 271B for AY 2026-27, and attracts a fee under section 428© from tax year 2026-27.
• Corrections. A revised return within time, or an updated return later, can correct an omission. Neither can be used to carry forward a loss that the original return did not determine in time.

Summary

1. Fix the Act by trade date: 1961 Act to 31 March 2026, 2025 Act from 1 April 2026.
2. Exchange-traded F&O through a registered broker is non-speculative business (section 43(5) proviso (d); section 66(31)(a) and (33)). Intraday equity is speculative, and a separate business.
3. Both are taxed at slab rates. STT is deductible as a business expense, at the higher F&O rates from 1 April 2026.
4. An F&O loss is set off against any income except salary and carried forward for eight years. A speculative loss is set off only against speculative profit and carried forward for four years. Both require a return filed on time.
5. Turnover for the audit is computed on the ICAI Guidance Note method, not the Act’s. The audit applies above Rs 1 crore, or Rs 10 crore where cash is within 5 per cent.
6. File ITR-3, with intraday and F&O turnover and income in items 12a to 12d.

The next guide, Reporting Capital Gains in the Return, covers Schedule CG and Schedule 112A.