NISM-Series-X-B: Investment Adviser (Level 2) · Taxation of Equity Products

Taxation of Equity Derivatives (F&O) and Intraday Trading for NISM

Updated 11 October 2026 · Fact-checked

Intraday equity trades settled without delivery are speculative business income. Futures and options on a recognised exchange are non-speculative business income. Both are taxed at slab rates. Speculative losses set off only against speculative gains and carry forward 4 years. Non-speculative losses carry forward 8 years. Tax audit depends on turnover.

Understand Taxation of Equity Derivatives (F&O) and Intraday Trading

Trading profits are not always capital gains. If you trade often and as a business, the income falls under profits and gains of business or profession. Within business income, the law splits trades into speculative and non-speculative. The split matters because it decides how losses are set off and carried forward.

A speculative transaction is one where a contract for purchase or sale of shares is settled without actual delivery. Intraday equity trading is the classic case. You buy and sell the same shares on the same day, and only the difference is settled. That difference is speculative business income or loss.

The law carves out exceptions. Trades in derivatives on a recognised stock exchange (futures and options) are treated as non-speculative, even though no delivery happens. So F&O profit or loss is non-speculative business income. Hedging transactions also have special treatment, but the usual exam focus is intraday versus F&O.

Both kinds of income are added to your other income and taxed at your normal slab rates. They are not charged at the special capital gains rates. STT paid is allowed as a business expense when the income is business income. Other genuine trading expenses are also deductible.

Losses are where marks are won. A speculative loss can be set off only against speculative income, and carried forward for 4 assessment years. A non-speculative business loss can be set off against almost any income except salary, and carried forward 8 assessment years against business income. To carry forward a loss, you must file the return on time.

Key formulas to remember

Intraday equity (no delivery): Speculative business income; Taxed at slab rates. Reported as business income, not capital gains.
F&O on recognised exchange: Non-speculative business income; Futures and options are carved out of the speculative definition. Taxed at slab rates.
Speculative loss set-off: Speculative loss → only against speculative income; It cannot be set off against F&O income, salary, capital gains or other income.
Speculative loss carry forward: Up to 4 assessment years, only against speculative income; Return must be filed by the due date.
Non-speculative business loss set-off: Against any head except salary, in the same year; It can be set off against speculative income, capital gains, house property and other sources.
Non-speculative business loss carry forward: Up to 8 assessment years, only against business income; Return must be filed by the due date.
Turnover for F&O (audit test): Turnover = Σ|profits and losses on each trade| + premium received on options sold; Add favourable and unfavourable differences as positive numbers. Reverse trades are included.
Turnover for intraday (audit test): Turnover = Σ|profit or loss on each square-off|; Absolute values, so losses add to turnover.
Tax audit turnover limit: ₹1,00,00,000; or ₹10,00,00,000 if cash receipts and payments are each 5% or less of the total; Apply the limit to business turnover. Confirm the cash condition before using the higher limit.

How to solve Taxation of Equity Derivatives (F&O) and Intraday Trading questions

Use this order for any question on trading income, set-off or audit.

1Check the nature of the trade. Is it intraday equity without delivery, or a derivative on a recognised exchange?
2Label it. Intraday equity is speculative. F&O on a recognised exchange is non-speculative. Delivery-based investment is capital gains.
3Net the profits and losses within each label first.
4Apply set-off. Speculative loss only against speculative profit. Non-speculative loss against any head except salary.
5Work out the loss left over. Carry forward speculative loss for 4 years and non-speculative loss for 8 years, only if the return is filed on time.
6Add the remaining business income to other income and tax it at slab rates.
7For audit, compute turnover using absolute values and compare it with the limit.

Quickest way: Two-bucket check

When to use it: Use it for MCQs that ask which loss can be set off against which income.

Draw two buckets: Speculative (intraday) and Non-speculative (F&O).
Speculative loss can go nowhere except into the speculative bucket.
Non-speculative loss can go into the speculative bucket and into capital gains. It cannot go against salary.
Remember 4 for speculative and 8 for non-speculative.
If turnover is asked, add the absolute values of all profits and losses.

Common mistakes in Taxation of Equity Derivatives (F&O) and Intraday Trading

Treating intraday profit as short-term capital gain.
Shares are involved, so students assume capital gains rules apply.
Fix: If the trade is settled without delivery, it is speculative business income taxed at slab rates.
Calling F&O income speculative.
Both intraday and F&O have no delivery, so they look alike.
Fix: Derivatives on a recognised exchange are expressly non-speculative. Memorise this carve-out.
Setting off an intraday loss against F&O profit.
Both are business income, so students merge them.
Fix: Speculative loss only meets speculative profit. The reverse is allowed: an F&O loss can be set off against intraday profit.
Using 8 years for speculative loss carry forward.
The two periods get mixed up.
Fix: Speculative is 4 years. Non-speculative business loss is 8 years.
Computing audit turnover as net profit.
Students treat turnover like sales.
Fix: Add the absolute value of every profit and loss, and add option premium received on sale.
Assuming a loss carries forward even if the return is filed late.
Students focus on the set-off rule and ignore the filing condition.
Fix: File the return by the due date to keep the right to carry forward the loss.

Worked examples

Example 1

Meera has salary income of ₹10,00,000. In the year she has an intraday equity loss of ₹80,000, F&O profit of ₹2,50,000 and short-term capital gain on delivery shares of ₹40,000. How is the intraday loss treated?

Show the solution

Classify: intraday loss is a speculative loss. F&O profit is non-speculative business income. The delivery gain is capital gains.
Check set-off: a speculative loss can be set off only against speculative income.
Meera has no speculative income this year, so the loss cannot be set off against F&O profit, capital gains or salary.
The entire ₹80,000 is carried forward, provided she files the return on time.
Her F&O profit of ₹2,50,000 is added to salary and taxed at slab rates. The capital gain is taxed under capital gains rules.

Answer: The ₹80,000 intraday loss is not set off this year. It is carried forward for up to 4 assessment years against speculative income only.

Example 2

Arun has salary income of ₹12,00,000. He has an F&O loss of ₹3,00,000, an intraday profit of ₹1,00,000 and a short-term capital gain of ₹1,50,000 on equity shares. Find how much of the F&O loss can be set off in the year and what is carried forward.

Show the solution

Classify: F&O loss is a non-speculative business loss. Intraday profit is speculative income. The gain is capital gains.
Non-speculative business loss can be set off against speculative income. Set off ₹1,00,000, leaving ₹2,00,000.
It can also be set off against capital gains. Set off ₹1,50,000, leaving ₹50,000.
It cannot be set off against salary, so the balance of ₹50,000 remains.
Total set off = ₹1,00,000 + ₹1,50,000 = ₹2,50,000. Balance = ₹3,00,000 − ₹2,50,000 = ₹50,000.
Carry forward the ₹50,000 for up to 8 assessment years, against business income only, if the return is filed on time.

Answer: ₹2,50,000 is set off this year. ₹50,000 is carried forward for up to 8 assessment years against business income.

Exam tips

Expect direct questions on the classification: intraday is speculative and F&O is non-speculative. Read the trade type before the numbers.
Look for the trap option that lets a speculative loss be set off against F&O or capital gains. It is wrong.
Match the years carefully: 4 for speculative and 8 for non-speculative.
In audit questions, check whether the figure given is turnover or profit. Turnover uses absolute values.
Remember that carry forward needs a return filed by the due date.

Practice questions from Taxation of Equity Products

Taxation of Equity Derivatives (F&O) and Intraday Trading: frequently asked questions

Is F&O income speculative or non-speculative?

F&O on a recognised stock exchange is non-speculative business income. The law specifically excludes these derivative trades from the speculative definition. It is taxed at your slab rates.

Is intraday trading income taxed as capital gains?

No. Intraday equity trades are settled without delivery, so they are speculative business income. They are taxed at slab rates and are not eligible for capital gains rates.

Can I set off F&O loss against salary?

No. A non-speculative business loss can be set off against other heads such as capital gains, house property and other sources, but not against salary. Any balance is carried forward for up to 8 assessment years against business income.

When is a tax audit needed for F&O traders?

It depends on turnover. For F&O, turnover is the sum of absolute profits and losses plus option premium received on sale. Compare it with the limit of ₹1,00,00,000, or ₹10,00,00,000 if the cash condition is met.