One dated note before the rules. From 1 April 2026 the Income-tax Act, 2025 replaced the Income-tax Act, 1961, and "tax year" replaced "previous year" and "assessment year". The section numbers in this module are the 1961 Act's, which still govern tax years up to 2025-26; for tax year 2026-27 onward read the corresponding provisions of the 2025 Act (Section 44AB's audit trigger is now Section 63 and Section 139's return due dates are now Section 263; as of October 2026, check each on incometaxindia.gov.in).
Section 43(5) of the Income-tax Act defines a speculative transaction as one settled otherwise than by actual delivery. Read literally, that would make every cash-settled derivatives trade speculative, and the consequences would be severe, because speculative losses can be set off only against speculative gains. Clause (d) of the proviso carves the segment out: an eligible transaction in derivatives, as defined in the securities law and carried out on a recognised stock exchange, is not speculative. Commodity derivatives get the same treatment under clause (e), subject to the commodities transaction tax.
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How are F&O profits and losses treated?
The result is a two-tier structure inside the same trading account, and the tier boundary is not where beginners expect it.
Exchange-traded futures and options, index or single-stock, produce non-speculative business income. Intraday equity trading, where a position is bought and sold the same day without delivery, remains speculative business income under the main limb of 43(5). Delivery-based equity investing sits under a different head entirely and is normally capital gains. A trader can therefore hold all three at once, and the losses do not talk to each other freely.
Non-speculative business losses can be set off in the same year against income under any head except salary, so a derivatives loss can absorb interest income and rental income. What is left carries forward for eight assessment years and can then be set off only against business income. Speculative losses can be set off only against speculative gains, in the year and on carry-forward, and the carry-forward runs for four years. And the whole carry-forward entitlement is conditional: the return must be filed by the due date under Section 139(1).
A loss return filed late loses the carry-forward. It is the most expensive avoidable mistake in this area and it costs nothing to avoid.
How is F&O turnover calculated?
Then turnover, which decides whether an audit is required and is computed on a basis that surprises people. For derivatives, turnover is the absolute sum of favourable and unfavourable differences, meaning the sum of the profits and the losses on each trade treated as positive numbers, not the notional value traded and not the net result. On a year of ₹8,42,000 of gains and ₹6,15,500 of losses, the net result is ₹2,26,500 and the turnover is ₹14,57,500.
The revised guidance note issued by the Institute of Chartered Accountants of India in 2022 removed the premium received on the sale of options from the turnover computation; the earlier edition included it. The difference is not academic. On the same year, with ₹41,80,000 of option-sale premium received, the older basis gives a turnover of ₹56,37,500, which is 3.87 times the current figure. Verify flag: use the current edition of the guidance note, and where a return has already been filed on the older basis, know which basis it used.
When is a tax audit required?
The audit trigger under Section 63 of the 2025 Act (Section 44AB of the 1961 Act) is ₹1 crore of turnover, raised to ₹10 crore where cash receipts and cash payments each stay at or below 5% of the total. Derivatives trading runs entirely through the banking channel, so the higher threshold is the operative one for almost every trader, and the ₹14,57,500 turnover above is 1.46% of it. There is a second route into an audit that catches people with small turnover: a taxpayer who has previously opted into the presumptive scheme under Section 44AD and then declares profit below the presumptive rate, while having total income above the basic exemption limit, is required to maintain books and get them audited. Six percent of the turnover above is ₹87,450 against a declared ₹2,26,500, so the presumptive floor is comfortably cleared here, but a loss year would put the same trader on the wrong side of it.
What can you deduct, and how does advance tax work?
Because this is business income, the expenses of earning it are deductible, which is the one genuinely favourable feature of the treatment. Brokerage, exchange and regulator charges, goods and services tax on those charges, the securities transaction tax itself, data subscriptions, advisory fees, internet and a depreciation charge on the equipment used all reduce the taxable figure. On ₹2,26,500 of net result, ₹38,400 of such expenses leaves ₹1,88,100 of business income.
Advance tax then applies, because business income carries no tax deducted at source. Where the liability for the year is ₹10,000 or more, it is payable in four instalments: 15% by 15 June, 45% cumulative by 15 September, 75% by 15 December and 100% by 15 March, with interest under Sections 234B and 234C on shortfalls. On a liability of ₹3,42,000, a trader who has paid only ₹1,00,000 by 15 September is short by ₹53,900 and owes ₹1,617 of interest at 1% a month for three months. Verify flag: instalment percentages, dates and the ₹10,000 threshold are statutory and are revised by Finance Act. The slab computation that produces the liability figure itself belongs to the personal-tax node; take the liability as given here and concentrate on the instalment mechanics, which is where derivatives traders actually go wrong.