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NISM-Series-VIII: Equity Derivatives · Accounting and Taxation

Taxation of Equity Derivatives Transactions for NISM Equity Derivatives

Updated 11 October 2026 · Fact-checked

Profit or loss from equity futures and options traded on a recognised stock exchange is non-speculative business income, not capital gains. You report it under 'Profits and gains of business or profession'. STT paid on exchange-traded derivatives is deductible as a business expense under Section 36(1)(xv) when the income is business income.

Understand Taxation of Equity Derivatives Transactions

Start with the basic idea. Indian tax law puts income into heads, such as salary, capital gains, business income and other sources. The first question for any derivatives profit is: which head does it belong to?

For futures and options, the answer in the NISM syllabus is business income. Derivative contracts are not held as investments to be kept for years. They are traded, they expire, and they are settled in cash. So the profit or loss is treated as income from a business or profession, not as capital gains.

The next question is whether it is speculative. Under Section 43(5) of the Income Tax Act, a speculative transaction is one where a contract for a purchase or sale of any commodity, including shares, is settled otherwise than by actual delivery or transfer. But the proviso to Section 43(5) carves out an exception: an eligible transaction in respect of trading in derivatives carried out on a recognised stock exchange is not a speculative transaction. So equity F&O on NSE or BSE gives non-speculative business income. This is the key point the exam tests.

Because it is business income, you can deduct genuine business expenses, such as brokerage, internet charges, data fees and similar costs, against the profit. STT paid on derivative transactions is allowable under Section 36(1)(xv) only when the income from those transactions is taxed as business income. It is not available as a deduction if the income is treated as capital gains. The allowance is subject to the provisions of the Act as amended. You pay tax at your normal slab rate (or the rate applicable to the type of taxpayer), not at the special capital gains rates.

The loss rules also follow business income. In the same year, a non-speculative business loss can be set off under Section 71 against income under any other head, with the exception of salary. The unabsorbed balance is carried forward for 8 assessment years and can be set off only against business income (Section 72). The condition for carrying forward the loss comes from Section 80: the return must be filed by the due date under Section 139(1). The detailed loss rules and STT are covered in their own topics, so study them next.

Turnover and audit are also linked to this topic. For F&O, turnover is not the total contract value. For futures, it is the sum of favourable and unfavourable differences. For options, it is the sum of favourable and unfavourable differences plus the premium received on sale of options, as per the ICAI Guidance Note. Turnover is one test for whether a tax audit applies under Section 44AB, which works on turnover thresholds. Loss and presumptive taxation conditions (Section 44AD) can also affect whether an audit is needed, so do not rely on turnover alone. Check the current limits in your workbook. Filing is done in ITR-3 for individuals with business income, not ITR-1 or ITR-2.

Key formulas to remember

Head of income
Equity F&O on a recognised exchange → Profits and gains of business or profession
Not capital gains and not income from other sources.
Nature of income
Eligible derivative trade on a recognised stock exchange → non-speculative (proviso to Section 43(5))
Share trades settled without delivery, such as intraday trading, are speculative. Only eligible transactions in derivatives on a recognised stock exchange are excluded from that definition.
Net F&O income
Net income = Total profits − Total losses − Allowable expenses (including STT paid under Section 36(1)(xv), only when the income is business income)
Taxed at the applicable slab rate. STT is not deductible if the income is capital gains. The allowance is subject to the Act as amended.
F&O turnover
Futures: turnover = favourable differences + unfavourable differences. Options: turnover = favourable differences + unfavourable differences + premium received on sale of options
Based on the ICAI Guidance Note. It is not the contract value. Tax audit under Section 44AB works on turnover thresholds, and loss or presumptive taxation (Section 44AD) conditions can also affect it. Check the current limits.
Loss set-off and carry forward
Same year: non-speculative business loss set off against income under any other head except salary (Section 71). Unabsorbed balance: carried forward 8 assessment years, set off only against business income (Section 72)
Section 80 makes carry forward conditional on filing the return by the due date under Section 139(1).
ITR form
Individual with F&O business income → ITR-3
ITR-1 and ITR-2 do not allow business income.

How to solve Taxation of Equity Derivatives Transactions questions

Use this order for any question on how F&O income is taxed. It stops you mixing up heads and the speculative label.

  1. 1Identify the instrument: is it an equity future or option traded on a recognised exchange?
  2. 2Decide the head of income: business or profession, not capital gains.
  3. 3Decide the nature: exchange-traded derivatives are non-speculative.
  4. 4Compute net income: add profits, subtract losses, then subtract allowable expenses (STT paid is deductible).
  5. 5If asked about losses, apply set-off and carry-forward: in the same year the loss can be set off against any head except salary, and the unabsorbed balance is carried forward 8 assessment years against business income only.
  6. 6If asked about filing or audit, think ITR-3 and the turnover method for F&O.
  7. 7Check the options for traps such as 'capital gains', 'speculative' or 'contract value as turnover' before you choose.

Quickest way: Three-word shortcut: Business, Non-speculative, ITR-3

When to use it: Use it when the question is a definition or classification MCQ and you need to answer in seconds.

  1. See 'equity futures or options on an exchange'. Say 'business income'.
  2. See 'speculative or non-speculative'. Say 'non-speculative'.
  3. See 'which form'. Say 'ITR-3'.
  4. See 'turnover'. Reject any option that uses full contract value.
  5. See 'loss carry forward'. Pick 8 assessment years.

Common mistakes in Taxation of Equity Derivatives Transactions

  • Treating F&O profit as capital gains

    Students link all market profits with shares and capital gains.

    Fix: Remember that derivatives are traded, not held as investments. Their income is business income.

  • Calling exchange-traded F&O speculative

    Cash-settled contracts look like they fit the speculative definition.

    Fix: The Act specifically excludes derivative trades on a recognised stock exchange, so they are non-speculative.

  • Using contract value as turnover

    Students think turnover means the total value traded.

    Fix: For F&O, turnover is based on the sum of favourable and unfavourable differences (plus premium received on sale of options), not notional value.

  • Choosing ITR-1 or ITR-2 for F&O traders

    These are the common forms for salaried people and investors.

    Fix: Business income requires ITR-3 for individuals.

  • Thinking a loss can be set off against salary

    Students remember 'set off against other heads' and forget the exception.

    Fix: A non-speculative business loss cannot be set off against salary income.

  • Forgetting that a late return loses the carry forward

    Students focus only on the 8-year period.

    Fix: Remember the condition under Section 80: the return must be filed by the due date under Section 139(1) for the loss to be carried forward.

Worked examples

Example 1

Ravi trades Nifty options on NSE. In a year he has total profits of ₹4,00,000 and total losses of ₹1,50,000. He pays ₹20,000 as allowable business expenses. He has no other income. What is his taxable business income and under which head?

Show the solution
  1. Net trading result = ₹4,00,000 − ₹1,50,000 = ₹2,50,000.
  2. Deduct allowable expenses: ₹2,50,000 − ₹20,000 = ₹2,30,000.
  3. Nifty options on NSE are exchange-traded derivatives, so the income is non-speculative business income.
  4. The head is 'Profits and gains of business or profession'.

Answer: ₹2,30,000, taxed as non-speculative business income at the applicable slab rates.

Example 2

Which of the following is the correct tax treatment of a loss from equity futures traded on a recognised stock exchange? (A) Capital loss, carried forward 8 years (B) Speculative loss, set off only against speculative income (C) Non-speculative business loss, set off in the same year under Section 71 against any other head except salary, with the balance carried forward 8 assessment years against business income only, if the return is filed by the due date as required by Section 80 (D) Loss from other sources, not allowed to be carried forward

Show the solution
  1. Equity futures on an exchange give business income, so (A) and (D) are wrong heads.
  2. Exchange-traded derivatives are excluded from the speculative definition, so (B) is wrong.
  3. A non-speculative business loss can be set off in the same year under Section 71 against any other head except salary.
  4. The unabsorbed balance can be carried forward for 8 assessment years against business income only (Section 72), provided the return is filed by the due date under Section 139(1) as Section 80 requires, so (C) fits.

Answer: (C)

Exam tips

  • Expect direct recall questions: head of income, speculative or not, and which ITR form.
  • Read the options for 'capital gains' and 'speculative'. Both are common wrong answers for exchange-traded F&O.
  • Remember the contrast: intraday shares without delivery are speculative, exchange-traded derivatives are not.
  • Learn the 8-year carry forward and the salary exception together as a pair.
  • Turnover questions are conceptual. Reject any option based on notional contract value.

Practice questions from Accounting and Taxation

Taxation of Equity Derivatives Transactions: frequently asked questions

Is F&O income business income or capital gains?

It is business income. Futures and options are traded rather than held as investments, so you report the result under 'Profits and gains of business or profession'.

Why is F&O income called non-speculative?

The proviso to Section 43(5) of the Income Tax Act excludes eligible derivative trades on a recognised stock exchange from the speculative transaction definition. So the income is non-speculative business income.

How do I file ITR for F&O trading?

Individuals with F&O income generally file ITR-3, because it allows business income. You report profits and losses, deduct allowable expenses, and check whether tax audit rules apply based on turnover.

Can F&O losses be carried forward?

Yes. In the same year, a non-speculative business loss can be set off under Section 71 against any other head except salary. The unabsorbed balance can be carried forward for 8 assessment years and set off only against business income. This needs the return to be filed by the due date under Section 139(1).