Taxability of Futures and Options (F&O) Transactions under the Income Tax Act, 1961

This document outlines the tax treatment of Futures and Options (F&O) transactions under the Income Tax Act, 1961, for FY 2024-25 (AY 2025-26), with references to relevant sections of the Act and the Institute of Chartered Accountants of India (ICAI) Guidance Note (Revised 2025).

1. Classification as Non-Speculative Business Income

Point: Income from F&O transactions is classified as non-speculative business income under the head "Profits and Gains of Business or Profession" (PGBP).

Details:

• Section 43(5) defines speculative transactions as those settled without actual delivery. However, proviso (d) excludes eligible derivative transactions (F&O) conducted on recognized stock exchanges from being speculative.

• For FY 2024-25, F&O income is taxed as business income, not capital gains, as per established provisions.

Reference:

• Section 43(5)(d), Income Tax Act, 1961
• ICAI Guidance Note on Tax Audit under Section 44AB, Revised 2025

2. Taxation of Profits and Losses

Point: Profits from F&O transactions are taxed at applicable slab rates, and losses can be set off or carried forward.

Details:

• Profits: Taxed as business income at slab rates for FY 2024-25 (e.g., 5%, 20%, 30% for individuals, depending on income levels, as per the new tax regime or old regime if opted).

• Losses: Non-speculative losses can be set off against:o Other non-speculative business income.o Income from other heads (except salary) under Section 71.

• Carry Forward: Unabsorbed losses can be carried forward for 8 assessment years (up to AY 2033-34 for losses incurred in FY 2024-25) and set off against future business income under Section 72.

• Securities Transaction Tax (STT): STT paid on F&O transactions is deductible as a business expense under Section 36(1)(xv).

Reference:

• Section 28, Income Tax Act, 1961
• Section 71, Income Tax Act, 1961
• Section 72, Income Tax Act, 1961
• Section 36(1)(xv), Income Tax Act, 1961
• ICAI Guidance Note on Tax Audit under Section 44AB, Revised 2025

3. Turnover Calculation for Tax Audit Purposes

Point: Turnover for F&O transactions is calculated based on absolute differences and premiums, impacting tax audit applicability.

Details:

• As per the ICAI Guidance Note (Revised 2025):

o Futures: Turnover is the aggregate of absolute values of profits and losses (favorable and unfavorable differences).

o Options (for FY 2024-25):

▪ Turnover includes the absolute value of profits/losses from squared-off or exercised transactions.

▪ Premiums received on the sale of options are included in profit/loss calculations and not added separately to turnover to avoid double counting.

▪ Differences from reverse trades are included if applicable.

Example (Futures): Buy 50 Nifty Futures at Rs 16,800, sell at Rs 16,250. Turnover = |Rs 8,12,500 - Rs 8,40,000| = Rs 27,500.

Example (Options): Buy 150 Nifty 16000 CE at Rs 325, sell at Rs 220. Difference = (Rs 220 - Rs 325) × 150 = -Rs 15,750 (loss). Turnover = Rs 15,750 (absolute value).

Reference:

• ICAI Guidance Note on Tax Audit under Section 44AB, Revised 2025
• Section 44AB, Income Tax Act, 1961

4. Tax Audit Applicability

Point: A tax audit is mandatory for FY 2024-25 if turnover exceeds specified thresholds or if opting out of presumptive taxation with low profits/losses.

Details:

• Section 44AB(a): Tax audit is required if turnover exceeds:

• Rs 1 crore for FY 2024-25.
• Rs 10 crore if cash receipts and payments do not exceed 5% of total receipts/payments (digital transactions dominate in F&O trading).

• Section 44AB(e): Audit is required if:o The assessee opts for presumptive taxation under Section 44AD, declares profits below 6% (digital transactions) or 8% (others), or incurs a loss, ando Total income exceeds the basic exemption limit (e.g., Rs 3 lakh for individuals under the new tax regime, Rs 2.5 lakh under the old regime for FY 2024-25).

• Exemption: No audit is required if turnover is below Rs 2 crore/Rs 3 crore and profits are declared at 6% (digital) or 8% (others) under Section 44AD.

Reference:

• Section 44AB(a), Income Tax Act, 1961
• Section 44AB(e), Income Tax Act, 1961
• Section 44AD, Income Tax Act, 1961
• ICAI Guidance Note on Tax Audit under Section 44AB, Revised 2025

5. Maintenance of Books of Accounts

Point: Books of accounts are mandatory for FY 2024-25 unless opting for presumptive taxation under Section 44AD.

Details:

• Section 44AA(2): Books must be maintained if:

o Income from business exceeds Rs 1.2 lakh, or

o Turnover exceeds Rs 10 lakh (Rs 25 lakh for individuals/HUFs) in any of the previous three years (i.e., FY 2021-22, 2022-23, or 2023-24).

• No books are required if declaring profits at 6% (digital) or 8% (others) under Section 44AD and turnover is below Rs 2 crore for FY 2024-25.
• If opting out of Section 44AD with profits below 6%/8% or a loss, books and audit are mandatory if income exceeds the basic exemption limit.

Reference:

• Section 44AA(2), Income Tax Act, 1961
• Section 44AD, Income Tax Act, 1961
• ICAI Guidance Note on Tax Audit under Section 44AB, Revised 2025

6. Presumptive Taxation Option

Point: Eligible assessees can opt for presumptive taxation under Section 44AD for FY 2024-25 to simplify compliance.

Details:

• Eligible entities (individuals, HUFs, partnership firms excluding LLPs) with turnover up to Rs 2 crore/Rs 3 crore can declare profits at:

• 6% of turnover for digital transactions (common in F&O trading).
• 8% for other transactions.

• No books or audit are required if profits are declared at or above these rates and turnover is below Rs 2 crore.

• Opting out of Section 44AD in FY 2024-25 (after opting in previously) triggers a 5-year lockout (until FY 2029-30) and may require a tax audit under Section 44AB(e) if profits are below 6%/8% or a loss is incurred.

Reference:

• Section 44AD, Income Tax Act, 1961
• Section 44AB(e), Income Tax Act, 1961
• ICAI Guidance Note on Tax Audit under Section 44AB, Revised 2025

7. Reporting in Income Tax Return (ITR)

Point: F&O income for FY 2024-25 must be reported under PGBP in the appropriate ITR form.

Details:

• ITR

Forms:

• ITR-3: For individuals/HUFs with business income from F&O.
• ITR-4: For those opting for presumptive taxation under Section 44AD.
• ITR-5: For Partnership firms including LLPs.

• Report profits/losses, allowable expenses (e.g., STT, brokerage), and turnover in the PGBP schedules of the ITR.

• If a tax audit is required, file Form 3CA/3CB and 3CD electronically before the ITR filing deadline (typically July 31, 2025, for non-audit cases, or September 30, 2025, for audit cases).

Reference:

• Section 139, Income Tax Act, 1961
• Section 44AB, Income Tax Act, 1961
• ICAI Guidance Note on Tax Audit under Section 44AB, Revised 2025

8. Deductions and Expenses

Point: Certain expenses related to F&O trading are deductible as business expenses for FY 2024-25.

Details:

• Allowable expenses include:

o Securities Transaction Tax (STT): Deductible under Section 36(1)(xv).

o Brokerage charges.

o Other expenses wholly and exclusively incurred for the business (e.g., internet, software subscriptions, office expenses) under Section 37(1).

Reference:

• Section 36(1)(xv), Income Tax Act, 1961
• Section 37(1), Income Tax Act, 1961
• ICAI Guidance Note on Tax Audit under Section 44AB, Revised 2025

Summary Table

Notes

• This document is based on the Income Tax Act, 1961, as amended by the Finance (No. 2) Act, 2024, and the ICAI Guidance Note on Tax Audit under Section 44AB (Revised 2025), applicable for FY 2024-25 (AY 2025-26).
• The ICAI Guidance Note (Revised 2025) incorporates amendments relevant for FY 2024-25 tax audits. For the official copy, visit www.icai.org.
• Consult a tax professional for case-specific advice, as interpretations and recent amendments may apply.