F&O tax rules every derivatives trader should know

Futures and options (F&O) trading in India has grown significantly, with 7.9 million active traders in fiscal year 2026. Despite this growth, many traders overlook the tax implications of their F&O activities. F&O profits are considered business income, not capital gains, which affects how they are taxed. Under the Income Tax Act, profits from F&O trading are taxed under the head "Profits and Gains of Business or Profession," and are added to the trader's total taxable income.

The tax rate applied depends on the trader's overall income, and there is no special tax rate for F&O profits. Traders can deduct eligible expenses such as brokerage charges, exchange transaction fees, and other costs related to trading, reducing their taxable income. However, losses cannot be deducted against salary income, but can be set off against other business income earned in the same year.

If losses cannot be fully absorbed in the current year, they can be carried forward for up to eight assessment years and set off against future business income. It is crucial for traders to report their losses correctly and file their income tax returns on time to preserve the right to carry forward and set off losses in subsequent years.