Overview
With rising interest in trading on platforms like Zerodha, Upstox, and AngelOne, Futures & Options (F&O) have become a go-to for thousands of new-age traders. But here’s the challenge: once profits (or losses) start rolling in, tax compliance becomes unavoidable.
“Do I need to audit my trading activity?”
“Can I file ITR-4 or should I go with ITR-3?”
“I had a loss in F&O. Do I still need to file?”
This post answers these questions backed by actual legal provisions, real case examples, and updated audit thresholds.
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Table of Contents
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F&O Trading Income: How Is It Treated Under Income Tax?
As per Section 43(5) of the Income Tax Act, F&O trading is a business activity, not capital gains. It is classified as a non-speculative business if:
- Executed on recognized stock exchanges
- Settled electronically without actual delivery
So, F&O income — whether profit or loss — must be reported under “Income from Business or Profession”, and not as capital gains or investments.
How to Calculate Turnover for F&O Trading (ICAI Guidance)
Turnover in F&O is not the same as total buy/sell value.
According to the ICAI’s Guidance Note on Tax Audit, turnover for F&O includes:
- Absolute profit + absolute loss on each trade (regardless of net P&L)
- Premiums received on option sales
- Differences on squared-off positions
Example:
Trade | Profit/Loss | Turnover Counted |
NIFTY Futures Profit ₹5,000 | ₹5,000 | ₹5,000 |
BANKNIFTY Futures Loss ₹5,000 | –₹5,000 | ₹5,000 |
Options Premium Received | ₹12,000 | ₹12,000 |
Total Turnover = ₹22,000
Even if your net profit is zero, turnover is the total of all these.
What Law Applies to F&O Tax Audit? [Updated for FY 2024–25]
Section | What It Does |
44AB(a) | Mandates audit if business turnover > ₹1 Cr (threshold can extend to ₹10 Cr in some cases) |
44AB(e) | Mandates audit if trader opts out of presumptive (Sec 44AD) and declares income <6% while income is above basic exemption |
44AD | Allows presumptive taxation (declare 6% profit) for eligible businesses, incl. F&O |
44AA | Requires books of account for business income |
271B | Penalty for non-compliance with audit requirement |
Section 44AD: Can F&O Traders Use Presumptive Scheme?
Yes. Since F&O is non-speculative business, traders can opt for Section 44AD, provided:
- Turnover ≤ ₹3 crore
- 95%+ of transactions are digital
- Profit declared ≥6%
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🚨 Budget 2023 Update:
Finance Act 2023 raised the 44AD turnover limit from ₹2 crore to ₹3 crore for digital-only businesses — a major advantage for full-time traders.
When Does Audit Become Mandatory for F&O Traders?
Path 1: Turnover-Based Audit – Section 44AB(a)
F&O Turnover | Cash Use | Audit Required? |
< ₹1 Cr | Any | No audit |
₹1–₹10 Cr | ≤ 5% cash | No audit (if digital & profit reasonable) |
> ₹10 Cr | Any | Audit required |
Path 2: Loss/Low Profit Audit – Section 44AB(e)
If all the below conditions are true, audit is mandatory:
- F&O turnover ≤ ₹3 Cr (eligible for 44AD)
- You did not opt for 44AD
- You declare loss or profit <6%
- Total income > exemption limit (₹3L under new regime)
Section 44AD: Presumptive Scheme for F&O Traders
F&O traders can opt for presumptive taxation under Section 44AD, because F&O is non-speculative business.
Benefits of 44AD:
- No need to maintain detailed books
- No audit if profit declared ≥6% (if receipts are digital)
- Simple filing using ITR-3 (or ITR-4 cautiously)
Case Study 1: Loss Situation Triggers Audit
Mr. Karan
- Salary Income: ₹3.5 lakh
- F&O Turnover: ₹25 lakh
- F&O Net Loss: ₹40,000
- All receipts digital
- Opted New Tax Regime
Audit Status:
- Did not opt 44AD
- Income > ₹3L
- Declared loss
Audit under 44AB(e) is mandatory
Must maintain books u/s 44AA
File ITR-3 + Tax Audit Report (Form 3CB/3CD)
Case Study 2: Profitable, Low-Income Trader – No Audit
Ms. Riya
- F&O Turnover: ₹8 lakh
- Net Profit: ₹70,000
- No other income
- All digital
Audit Status:
- Opted 44AD
- Profit ≥6%
- Total income < ₹3L
No audit required
Can file ITR-3 or cautiously use ITR-4
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Understanding the ₹10 Crore Audit Threshold: Is It Relevant for F&O Traders?
A common misconception among traders is that tax audit is mandatory only if turnover exceeds ₹10 crore. This belief stems from the amendment to Section 44AB(a), which raised the audit threshold from ₹1 crore to ₹10 crore, subject to specific conditions.
The provision, introduced by the Finance Act 2021, was designed to ease compliance for businesses with digital transactions. Under this rule, if a trader’s total business turnover does not exceed ₹10 crore and at least 95% of receipts and payments are through banking channels (non-cash), then tax audit is not required under Section 44AB(a) — even if turnover crosses ₹1 crore.
While this relaxation benefits many regular businesses, its applicability to F&O traders is often misunderstood. Here’s why:
F&O trading is considered a non-speculative business, which means it falls under the eligible category for presumptive taxation under Section 44AD. Now, when an F&O trader chooses not to opt for Section 44AD, and instead reports actual profits or losses, the rules shift. If such a trader:
- Declares profit below 6% (or incurs a loss), and
- Gross total income exceeds the basic exemption limit (₹3 lakh under the new regime),
then audit becomes mandatory under Section 44AB(e) — regardless of whether turnover is ₹25 lakhs or ₹4 crores.
In this scenario, the ₹10 crore threshold under Section 44AB(a) becomes irrelevant. The audit is triggered not because of turnover, but because the trader did not opt for presumptive taxation and reported less than the deemed profit, combined with income exceeding the exemption limit.
So, in practical terms, the ₹10 crore limit helps only those traders who do not fall under the presumptive scheme or have opted out without violating the conditions of Section 44AB(e). For most F&O traders who incur losses or prefer to declare actual income, the audit requirement arises from 44AB(e), not 44AB(a).
In summary, while the ₹10 crore audit threshold is a welcome relief for traditional digital businesses, its protection does not extend to most F&O traders who report low profit or loss without using Section 44AD. The trader must then maintain books of accounts under Section 44AA and get them audited under Section 44AB(e), irrespective of whether their turnover is ₹5 lakh or ₹5 crore.
Documents Checklist for F&O Traders (Filing + Audit)
- Contract Notes + Trading P&L Summary
- Ledger/Turnover Certificate (from broker)
- Bank Statements (linked to trading account)
- Form 26AS + AIS (Annual Info)
- Form 16 (if salaried)
- Books of accounts (if not presumptive)
Declaration (if opting 44AD)
What is the due date for audit report filing for F&O traders?
For AY 2025–26 (FY 2024–25), the due date for filing the tax audit report (Form 3CB & 3CD) is 30th September 2025 (subject to extension).
The ITR-3 should also be filed by this date to be valid.
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Advanced FAQs for F&O Traders – Going Beyond the
Basics (FY 2024–25)
1️ Can salaried individuals with
F&O trading file under presumptive scheme (Section 44AD)?
Yes. As long as the F&O activity qualifies as a non-speculative
business, salaried individuals can opt for Section 44AD for that activity
separately. However, they must still use ITR-3 to report both salary and
presumptive business income in the same return.
2️ If I incur F&O loss and
also have salary income above ₹3 lakh, do I still need audit?
Yes, in such a case, audit under Section 44AB(e) becomes
mandatory because:
- You’re
eligible for 44AD but not opting for it - You’ve
reported loss or <6% profit - Your
total income exceeds the basic exemption limit
3️ Can I opt for Section 44AD in
one year and declare actual loss in the next?
Yes, but with caution. If you opt out of 44AD after using it,
you may become ineligible to opt in again for the next 5 assessment years as
per Section 44AD(4).
In such cases, if your turnover and income criteria are met, audit may become
compulsory under 44AB(e) in the following years.
4️ What if I switch from 44AD to
regular business and my F&O income is below ₹2.5 lakh?
If your total income remains below the exemption limit, and
you’re not claiming loss carry-forward, then you can file without audit — even
after switching from presumptive to regular income reporting.
5️ Does the audit requirement
differ under the old and new tax regimes?
The basic exemption limits differ:
- ₹2.5 lakh (old regime)
- ₹3 lakh (new regime)
But the audit applicability under 44AB(e) remains the same:
➡️
If total income exceeds the relevant basic exemption and profit is <6%,
audit applies.
So yes, the regime chosen affects the audit threshold indirectly through the
exemption limit.
6️ If I have F&O loss and
speculative intraday loss, how should I file?
You must use ITR-3 and maintain separate reporting of:
- F&O
income under non-speculative business - Intraday
(same-day) trading under speculative business
Audit applicability will depend on F&O income provisions
(44AD/44AB), but speculative losses also require full books, and cannot be
reported under presumptive taxation.
7️ Can I split my trading between
personal and business accounts to avoid audit?
No. The Income-tax Act views your PAN as one tax unit.
Splitting trades across accounts (including family accounts) does not eliminate
audit requirement, and may attract scrutiny under anti-avoidance provisions.
All trading activity under your name should be considered cumulatively.
8️ Is audit needed if my F&O
turnover is ₹7 crore, all digital, and profit declared is 8%?
No, audit is not needed in this case because:
- Your
turnover is below ₹10 crore - You
meet the digital receipts condition - You
are declaring ≥6% profit
This falls outside audit requirements under both 44AB(a) and
44AB(e).
9️ Can I declare income under
44AD if I have capital gains or other income?
Yes. As long as your primary trading activity (F&O)
qualifies as non-speculative, you can opt for 44AD.
Other income like capital gains, salary, interest, etc., can be reported
separately in ITR-3.
1️0 What happens if I opt for presumptive income but declare <6% profit?
If your receipts are 100% digital, the minimum profit to
declare under 44AD is 6% of turnover.
Declaring less than 6% — even voluntarily — will be treated as non-opting of
presumptive, and may attract audit under 44AB(e) if other conditions apply.
1️1 Can I file a revised return if I forgot to declare F&O loss properly?
Yes, if filed within the time limit u/s 139(5).
However, if audit was required and not done, revising the return without audit won’t
cure the default, and may disallow loss carry forward.
1️2 What is the penalty if I fail to conduct audit where required?
Under Section 271B, the penalty is:
0.5% of turnover, or ₹1.5 lakh, whichever is lower
Avoid this by ensuring you assess audit applicability
carefully and file your audit report on time.
1️3 Can I carry forward F&O losses if I declare income under Section 44AD?
No. If you opt for presumptive taxation, you cannot claim or
carry forward business losses.
To preserve losses for future set-off, you must declare actual P&L and
maintain books + audit (if required) under regular provisions.
Final Thoughts: Compliance Is Not Optional
If you’re serious about trading, you must be serious about tax compliance.
Whether you make ₹1,000 or ₹1 crore, understanding your audit obligations will:
- Avoid notices and penalties
- Preserve losses for set-off
- Ensure smooth refund processing
- Maintain credibility for loans or credit
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Jithin Jose
Thanks for the reading
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