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Can you use F&O losses when filing tax returns?

You probably trade in futures and options (F&O) and have lost money this fiscal year if this blog grabbed more than just your curiosity. While we wish you luck in future transactions, there is one bright spot: Non-salaried income can use any F&O losses when submitting tax returns. In this post, we answer your most pressing questions concerning F&O loss, its reporting in yearly income tax returns, and if you need to request a tax audit for F&O loss.

Which type of ITR is required to show the F&O Losses?

F&O income and loss are reported under the category of business and profession profits and gains. So take care! Do not count it as part of your capital gains or losses. To report your income, use ITR -3 Form

This ITR-3 Form is perfect to show you your all F&O and Intraday Losses for trading. ITR-3 has a separate column for Business Income & Losses where you can show books of Accounts of your Trading Account or can show on a presumptive basis.

In the ITR-3 Form if you choose to Maintain the Books of the Accounts then it requires the Tax Audit to show the Future and Options Losses because ITR-3 is not allowed to offer less than 8% Profit of the Turnover without Audit in an F&O Case.

Benefits of Showing F&O Losses in ITR -3

A) You can carry forward your F&O losses for the following year, allowing you to easily offset your profits against your losses and avoid paying future & options taxes whenever you make a profit.

B) You can easily carry forward F&O Losses for the ensuing 8 years, but keep in mind that you must file ITR-3 each year in order to do so.

F&O Turnover Calculation

We must compute Trading Turnover in order to determine whether the Tax Audit is applicable or not. It is significant to remember that tax obligations are independent of turnover.

Futures and Options Trading Turnover = Absolute Profit

F&O Trading Tax Audit

If the taxpayer has incurred a loss or the profit is less than 6% of Trading Turnover and total income is more than the basic exemption limit, a Tax Audit is applicable.

How to calculate the turnover?

According to all of your contract notes, F&O turnover is not the total turnover. The turnover is the sum of the absolute positive value of profits and losses for income tax purposes. Sounds complicated? Let's simplify it for you.

Assume you made the gains and losses on the five F&O trades listed below.

Trade 1: (-10,000) rupees

Trade 2: 20,000 rupees

Trade 3: (-30,000) rupees

Trade 4: 40,000 rupees

Trade 5: (-50,000) rupees

Your overall revenue in this scenario would be Rs 1.5 lakh. If these were the only F&O trades you made throughout the year, your net loss on F&O trades would be 30,000, or less than 6% of your total turnover of Rs. 1.5 lakh. Hence you will have to get your books audited assuming your total income is taxable.

For the purpose of the audit, you will require:

  • Profit and Loss (P&L) accounts

  • Balance Sheet

  • Bank statement

  • F&O trade-wise contract notes

It's important to note that you can only carry F&O losses forward if you filed your income tax return prior to the deadline that applied to you and had your books audited by a licensed chartered accountant. So, before you make a choice, talk to your financial advisor.

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