Can You Carry Forward Losses in Futures & Options Trading? Here’s What Tax Rules Say

The popularity of Futures and Options (F&O) trading has surged in recent years, with a large number of retail investors entering the derivatives market. However, many traders remain unaware that F&O trading is treated as a business activity under Indian Income Tax rules. As a result, the taxation guidelines for derivatives differ significantly from those applicable to regular salary or investment income.

A common concern among traders is whether losses incurred in F&O trading can be carried forward to future years. To address this, Moneycontrol sought insights from noted tax expert and Chartered Accountant Balwant Jain, who explained how the tax laws apply to derivatives traders and what conditions must be met to claim such benefits.

F&O Is Considered a Business — Not Just Trading

According to Jain, individuals who trade regularly in options or futures are classified as doing business. This classification comes with certain compliance requirements.

If your annual income exceeds ₹1.20 lakh, or if your business turnover crosses ₹10 lakh, you are legally required to maintain proper books of accounts.

And no—bank statements and broker contract notes are not enough.

A trader must maintain:

• A journal

• A cash book

• A bank book

Failure to maintain these records can attract a penalty of ₹25,000 under the Income Tax Act.

When Does a Trader Need a Tax Audit?

Beyond maintaining books of accounts, Jain explains that a tax audit becomes mandatory under certain conditions.

You must get your accounts audited if:

1. Your total business turnover exceeds ₹1 crore,

OR

2. Your cash receipts and payments are within 5% of total transactions,

and your turnover is up to ₹10 crore.

Additionally, if a trader has opted for the presumptive taxation scheme under Section 44AD at any time in the last four years, and in the current year:

• their income exceeds the basic exemption limit, and

• they declare profits of less than 6% from F&O trading,

then an audit becomes compulsory.

Failing to get a mandatory audit and not submitting the report at least one month before the ITR filing deadline can attract a penalty of 0.5% of turnover, capped at ₹1.5 lakh.

Can You Adjust F&O Losses Against Other Income?

Here is the most important part for traders:

Losses from F&O trading cannot be adjusted against other income in the same year.

This means that if you incur losses from derivatives trading, you cannot set them off against:

• salary income

• interest income

• rental income

• capital gains

Rules for Carrying Forward F&O Trading Losses

Jain clarifies that F&O losses are considered business losses, and the Income Tax Act allows traders to carry forward these losses for up to eight assessment years.

However, losses carried forward can only be set off against future business income, including future gains from F&O trading.

Important Condition: Timely Filing of ITR

To carry forward F&O losses:

• You must file your Income Tax Return before the deadline.

• For individuals not requiring an audit, the usual due date is July 31.

• For those requiring an audit, the typical deadline is October 31.

Filing after the due date will disqualify you from carrying forward losses, even if all other conditions are satisfied.

Expert Advice for F&O Traders

Managing taxes is an essential part of derivatives trading. Neglecting bookkeeping or missing audit deadlines can lead to penalties and loss of tax benefits. Traders should maintain proper records and consult certified tax professionals when necessary.