Lost money in F&O trading? Understand tax rules, set-off & carry forward concepts before filing ITR

A total of 95.75 lakh individuals traded in futures & options (F&O) derivatives in FY24, according to a report by market regulator SEBI. However, 91.1% of them incurred a loss on a net basis.

While income-tax provisions related to paying taxes on F&O profits are quite straightforward, the rules get a bit tricky when it comes to losses.

As the income-tax return (ITR) filing deadline for FY25, i.e., July 31, 2025, is approaching for individuals, in this article, we’ll dive deeper into understanding all relevant income-tax provisions for the F&O traders, whether loss-making or not.

We’ll cover important provisions regarding the following:

1. Classification of the relevant head of income, such as business or capital gains or other sources
2. Whether or not income from F&O is speculative business income
3. Setting off and carrying forward F&O business losses
4. Presumptive taxation
5. Applicability of tax audits
6. Why you should not miss filing an ITR even if you have a loss from F&O trading

Classification of F&O income or loss

As per Section 43(5) of the Income Tax Act, 1961 (‘IT Act’), income or loss from F&O is classified as non-speculative business income and must be declared under the head of Profits and Gains of Business or Profession (‘PGBP’), which are taxed as per normal provisions of the IT Act and an individual’s relevant slab rate.

This is opposed to other kinds of trades like intraday trading or other long-term or short-term investments, which may be classified as speculative business or capital gains, depending on the exact nuances of the situation, and will attract taxes accordingly.

This classification is important as it allows for broader set-off options compared to speculative transactions, which we will see in the following sections.

Intra-head set-off rules

Intra-head set-off refers to the adjustment of losses against income from another source within the same head of income. For F&O trading, which is classified as non-speculative business income, this means that losses can be set off against any other business income under the same head.

According to Section 70 of the IT Act, if the net result for any tax year with respect to any source under the head PGBP is a loss, the tax filer is entitled to set off the amount of such loss against income from any other source under the same head.

For example, a loss incurred on F&O trading can be set off against profits from another business activity, such as a retail business within the same financial year.

Inter-head set-off rules

Inter-head set-off involves adjusting losses from one head of income against income from another head. This is subject to certain restrictions and conditions as specified in the Income Tax Act.

As per Section 71 of the IT Act, a non-speculative business loss, such as that from F&O trading, can be set off against income from all other heads but not against "Income from Salaries".

This means that if an individual incurs a loss from F&O trading, they can offset this loss against rental income, capital gains or interest income, but not against their salary income.

Carry forward of F&O business losses

Non-speculative business losses, such as those from F&O trading, can be carried forward for up to eight tax years following the year in which the loss was first computed. This is as per Section 72 of the IT Act.

Now, in order to be eligible for this provision, it is compulsory that the return of income/loss be filed on or before the due date specified under section 139(1) of the IT Act, which is typically July 31, unless an audit under Section 44AB of the IT Act is required, in which case it is extended to October 31 of the tax year.

Carried-forward non-speculative business losses can only be set off against income charged to tax under the head "Profits and Gains of Business or Profession" in subsequent years.

This means that if you have a carried forward F&O business loss, it can be set off against any business income, including profits from F&O trading itself, in the subsequent years.

Can a taxpayer claim presumptive taxation here?

This is a question widely debated amongst experts. A lot of F&O traders file ITR-4 on a presumptive basis as per section 44AD of the IT Act because of the huge difference that comes in tax liability as opposed to normal tax provisions. Please note that it is a risky position to claim section 44AD of the IT Act while declaring profits from F&O.

It is worthwhile to note that the tax department has already started sending out notices to traders who claimed F&O profits as per the presumptive tax provisions.

When is a tax audit required for F&O traders?

The applicability of a tax audit arises when the turnover is above ₹10 crores in a tax year.

As per the ICAI Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023), the turnover is supposed to be calculated only on squared-off transactions during the financial year. The turnover shall be calculated as a sum of:

1. The total of favourable and unfavourable differences in case of squared-off transactions shall be taken as turnover.
2. The premium received on the sale of options is also to be included in turnover. However, where the premium received is included for determining net profit for transactions, then such net profit should not be separately included.
3. In respect of any reverse trades entered, the difference thereon should also form part of the turnover.

In the case of delivery-based settlement in a derivatives transaction, the difference between the trade price and the settlement price shall be considered as turnover. Further, in the hands of the transferor of the underlying asset, the entire sale value shall also be considered as business turnover where the underlying asset is held as stock in trade.

Table: Calculation of F&O Turnover

Income or loss from trading in futures and options is classified as non-speculative business income. Losses, if they arise, can be set off from any income under the same PGBP head or from all other heads of income, excluding salary. Carry-forward is allowed for up to eight tax years, but the ITR must be filed before the due date. Tax audits are mandatory if the turnover exceeds the threshold of ₹10 crore.