How to Report F&O Loss in ITR for AY 2025-26: Step-by-Step Guide to Saving Every Rupee You Can

The last date for filing your Income Tax Return (ITR) is getting very close. As a trader, you handle the ups and downs of the market every day, but now comes the hard part: filing your taxes. If you had a loss in Futures & Options (F&O) this year, you might think it’s better to just forget about it. But please don’t! That loss is actually very useful. Showing your F&O loss correctly in your ITR is not only required by law, but it’s also a smart trick to lower your tax on profits for the next eight years!

Also Read-Which ITR Form to Use for Salaried Employee: ITR-1 vs ITR-2

As a tax expert, I have seen many traders lose thousands, and even lakhs, of rupees just because of small mistakes that are easy to avoid. They calculate their turnover wrongly, pick the wrong ITR form, or don’t know about the amazing benefit of ‘carrying forward’ their losses. This guide will make everything simple for you. We will explain every single step, from what F&O trading means for tax, to how to fill the ITR-3 form correctly. Our goal is to help you follow the law and also save as much tax as possible.

This is not a boring tax article. Think of it as your personal, step-by-step guide with all the latest rules for this year (AY 2025-26). We will explain difficult topics like turnover calculation and the scary tax audit in an easy way. By the end of this guide, you will feel confident and ready to turn this year’s loss into next year’s profit. Let’s start.

Section 1: First Things First – Why F&O Trading is a “Business” in the Eyes of the Taxman.

Before you can report your F&O loss, you need to understand how the Income Tax Department sees your trading activity. This is the most important concept, and getting it right makes everything else fall into place.

It’s Not an Investment, It’s a Business.

Think of it like this: If you buy a house and rent it out for years, that’s an investment. The profit you make when you finally sell it is a ‘Capital Gain’. But if your job is to buy and sell houses every few weeks to make quick profits, that’s a business.

F&O trading is like the second case. You are not holding contracts for years; you are buying and selling frequently to profit from price changes. Because of this, all your profits and losses from F&O are treated as Business Income, not Capital Gains.

Good News: It’s a “Non-Speculative” Business.

The tax department further divides business income into two types: Speculative and Non-Speculative.

• Speculative Business: This is like pure betting. Intraday equity trading (buying and selling stocks on the same day) is the best example. The rules for its losses are very strict.
• Non-Speculative Business: This is considered a more legitimate form of business. Futures & Options trading falls into this category. The government sees it as non-speculative because F&O contracts are often used by big players for hedging (protecting their investments) and are based on an underlying asset.

This “Non-Speculative” tag is a huge advantage for you. It means the rules for your F&O loss are much more flexible and beneficial, allowing you to set it off against other incomes and carry it forward for 8 long years.

What This “Business” Tag Means for You:

1. You Can Claim Expenses: Just like any shop owner can deduct rent and electricity bills, you can deduct expenses related to your trading. This includes:
   • Brokerage fees and transaction charges.
   • Securities Transaction Tax (STT).
   • GST paid on brokerage.
   • Internet and phone bills (you can claim a reasonable percentage, say 50%, if you also use it for personal reasons).
   • Salary paid to anyone helping you trade.
   • Subscriptions to financial magazines, software, or advisory services.
   • Depreciation on your laptop or computer used for trading.
2. You Must Use ITR-3: You cannot use the simple ITR-1 or ITR-2 forms. You must declare your business income using ITR-3.
3. You Need Basic Records: You should keep your broker’s Profit & Loss (P&L) statement, contract notes, and bank statements safe. These are your ‘books of accounts’.
4. “Turnover” and “Tax Audit” Become Important: These are two words you’ll hear a lot. We will cover them in detail next.

Section 2: The Big Question – How Do I Calculate My F&O Turnover?

“Turnover” is a scary word, but it’s simpler than you think. It’s NOT the total value of your trades. It’s a special calculation the tax department uses to see how much trading you’ve actually done. This number is very important because it decides if you need a tax audit.

The main idea is to add up the “absolute profit” from every trade. “Absolute” just means you treat every loss as a positive number when you’re adding them up.

How to Calculate Turnover for Futures.

For futures, it’s very simple. Just take the profit or loss from each trade and add them all up, ignoring any minus signs.

Simple Formula: For every trade, find the Profit or Loss. Add all these numbers together as if they were all positive.

Example 1: Futures Turnover.
Imagine you made these three trades:

1. Trade 1: Profit of ₹40,000
2. Trade 2: Loss of ₹70,000
3. Trade 3: Profit of ₹10,000

Your actual net result is a loss: (40,000 – 70,000 + 10,000) = -₹20,000 (Loss).
But for your turnover, you do this: 40,000 + 70,000 + 10,000 = ₹1,20,000.
So, your Turnover for tax purposes is ₹1,20,000.

How to Calculate Turnover for Options.

For options, there’s one extra step. You calculate the turnover in two parts and add them together.

1. Part 1: Absolute Profit: Just like with futures, add up all your profits and losses, ignoring the minus signs.
2. Part 2: Sale Premium: Add the total amount of premium you received whenever you sold an option (also called ‘writing’ an option).

Simple Formula: (Total of all profits and losses, ignoring minus signs) + (Total premium received from selling options).

Example 2: Options Turnover.
Let’s say you did two option trades:

1. Bought a Call Option: You paid ₹10,000 premium and later sold it for ₹15,000. Your profit is ₹5,000.
2. Sold a Put Option: You received a premium of ₹20,000. Later, you bought it back for ₹12,000 to close the position. Your profit is ₹8,000.

Now let’s calculate the turnover:

• Part 1 (Absolute Profit): Your profit from trade 1 is ₹5,000. Your profit from trade 2 is ₹8,000. Total absolute profit = 5,000 + 8,000 = ₹13,000.
• Part 2 (Sale Premium): In trade 1, you bought first, so no sale premium to consider initially. You sold it for ₹15,000. In trade 2, you sold and received ₹20,000 premium. So, total sale premium = 15,000 + 20,000 = ₹35,000.
• Total Options Turnover = Part 1 + Part 2 = 13,000 + 35,000 = ₹48,000.

Important Note: Some Chartered Accountants say you only need to calculate the absolute profit (Part 1). However, to be safe and avoid any questions from the tax department, it’s always better to use the more conservative method and add both parts.

Where Do I Find This Information?

All this data is readily available in the Profit & Loss (P&L) statement provided by your stockbroker (like Zerodha, Upstox, etc.). They usually provide a tax-ready P&L statement around the end of the financial year which has these calculations done for you.

Section 3: Do I Need a Tax Audit? Making Sense of Section 44AB.

A “tax audit” means you need a Chartered Accountant (CA) to check your financial records and confirm to the government that everything is correct. It sounds scary, but it’s just a verification process. Here’s a simple checklist to see if you need one for AY 2025-26.

The applicability of a tax audit for an F&O trader depends on your turnover and your net profit/loss. For AY 2025-26, the rules are as follows:

The All-Important Tax Audit Checklist for F&O Traders.

Answer these simple questions:

1. Is your total F&O turnover more than ₹10 Crore?

• If YES, you need a tax audit. No more questions.

2. Is your total F&O turnover between ₹1 Crore and ₹10 Crore?

• This is a special case for digital businesses. Since F&O trading is 100% digital, a tax audit is NOT required here. You are safe.

3. Is your total F&O turnover less than ₹1 Crore?

• Now, look at your result. Did you have a LOSS? Or did you have a profit that is less than 6% of your turnover?
  • If YES to either, ask one more question: Is your total income from all sources (Salary, Interest, etc.) more than the basic tax-free limit (₹3 Lakh in the new regime)?
    • If YES again, then a tax audit is mandatory for you.
    • If NO (your total income is below the tax-free limit), you don’t need an audit, but you must still file ITR to carry forward the loss.

Let’s simplify the most common case for people with losses:

The Golden Rule for F&O Loss: If you have an F&O loss AND your total income (like salary, interest) is more than ₹3 lakh, you MUST get a tax audit.

Why does the government insist on an audit for losses?
Because you will use this loss to save tax for the next 8 years. The government wants a CA to certify that your loss claim is genuine and calculated correctly before they allow you this benefit.

What is the penalty for not getting a mandatory audit?
You could be fined 0.5% of your turnover, up to a maximum of ₹1.5 lakhs. It’s much cheaper and safer to just get the audit done.

Section 4: Choosing the Right Weapon – Why ITR-3 is Your Only Option.

Once you know you have business income from F&O, your choice of ITR form becomes very easy.

• ITR-1 (Sahaj): For simple salary income. You cannot use this.
• ITR-2: For salary, property, and capital gains, but NOT business income. You cannot use this.
• ITR-4 (Sugam): For small businesses who want to declare a profit of 6% or 8% of turnover without maintaining books. You cannot declare a loss in this form. So, ITR-4 is useless for you.
• ITR-3: This is the one! It is designed specifically for people who have income from a business or profession. It has all the necessary sections (called ‘schedules’) to report your turnover, expenses, profits, losses, and balance sheet correctly.

Bottom Line: If you have any F&O trades (profit or loss), you must file ITR-3. Using any other form will lead to a ‘defective return’ notice from the tax department, and you will lose the chance to carry forward your loss.

Section 5: Filling the ITR-3 Form: A Step-by-Step Walkthrough.

This is the main event. Filing ITR-3 seems complex because it’s a long form, but you only need to fill a few key sections for your F&O loss. Let’s go through them one by one.

Step 1: Get Your Documents Ready.

Before you open the ITR utility, keep these handy:

• Your broker’s Tax P&L Statement for the Financial Year 2024-25.
• Your bank statements.
• Your Form 26AS and Annual Information Statement (AIS) from the income tax portal (to check all your income details).

Step 2: Fill General Information and Nature of Business.

In the first part of the form, fill in your personal details. In the ‘Nature of Business’ section, you need to add a business code.
Select code 21010 – Futures and Options (F&O) Trading. This is the new, specific code for F&O.

Step 3: Fill the ‘Schedule P&L’ (Profit and Loss Account).

This is where you tell the government how much you earned or lost.

• In the ‘Credits’ (Income) section: Under ‘Revenue from Operations’, enter your Turnover figure (the one we calculated in Section 2).
• In the ‘Debits’ (Expenses) section: You need to enter your total expenses. Add up all the expenses we discussed in Section 1 (brokerage, STT, internet bills, etc.) and put the total under ‘Other expenses’.
• The form will automatically subtract your expenses from your revenue to show your final profit or loss. In your case, this will be a negative number (a loss).

Step 4: Fill the ‘Schedule Balance Sheet’.

The Balance Sheet is a snapshot of your financial position on the last day of the financial year (March 31, 2025).

• Is it mandatory? If you need a tax audit, it’s mandatory. If not, it’s still highly recommended to fill it.
• What to fill?
  • Assets (what you own): This includes the money in your trading account, the value of your computer, etc.
  • Liabilities (what you owe): This includes your capital (your own money invested) and any loans you might have taken for trading.

Step 5: Report the Loss in ‘Schedule BP’.

‘Schedule BP’ (Business Profession) is where the form officially calculates your final business loss according to tax rules. The loss figure from your P&L account will be automatically carried here.

Step 6: Use the Loss Now – ‘Schedule CYLA’.

‘CYLA’ stands for Current Year Loss Adjustment. This is where the magic starts. The form will take your F&O loss from Schedule BP and try to set it off against any other income you have in the current year.

• It can be set off against your Capital Gains (from shares, mutual funds, etc.).
• It can be set off against your Interest Income (from FDs, savings accounts).
• It can be set off against Rental Income.
• Important: It CANNOT be set off against your Salary Income.

Step 7: Save the Rest for Later – ‘Schedule CFL’.

‘CFL’ stands for Carry Forward of Losses. After setting off the loss against your current year’s income in CYLA, if there is still some loss left over, it will automatically appear in this schedule.

• This schedule is your official proof that you have a loss that you can use in the future. It will show the year (AY 2025-26) and the amount of loss you are carrying forward.

After filling these sections, review everything, generate the tax file (XML), and upload it to the portal. Remember to e-verify it within 30 days!

Section 6: The Best Part – How to Use Your Loss for the Next 8 Years.

Correctly reporting your loss is only half the job. Now you need to understand how to use this loss as a tax-saving tool.

Year 1: Setting Off the Loss (AY 2025-26).

As we saw in Schedule CYLA, in the first year, you can use your F&O loss to reduce almost any other income you have, except for your salary.

Example: How Set-off Works
Let’s say in FY 2024-25, you have:

• Salary Income: ₹10,00,000
• F&O Loss: (₹3,00,000)
• Interest Income from FD: ₹1,00,000

Here’s how your tax will be calculated:

1. Your F&O loss of ₹3,00,000 will first be used to wipe out your Interest Income of ₹1,00,000.
2. Your Interest Income becomes ₹0.
3. You still have a remaining F&O loss of (₹3,00,000 – ₹1,00,000) = ₹2,00,000.
4. This remaining loss cannot touch your salary. So, you will pay tax only on your salary income of ₹10,00,000.
5. The leftover loss of ₹2,00,000 gets carried forward to the next year.

Years 2 to 8: Using the Carried Forward Loss.

You can carry this ₹2,00,000 loss forward for 8 assessment years (until AY 2033-34). But there’s one new rule:

• In the following years, this brought-forward loss can only be set off against future Business Income (either from F&O or any other business).

Example: Carry Forward in Action.

• Next Year (AY 2026-27): You make an F&O profit of ₹5,00,000.
  • You can use your brought-forward loss of ₹2,00,000 to reduce this profit.
  • Your taxable F&O profit will be: ₹5,00,000 – ₹2,00,000 = ₹3,00,000.
  • You saved tax on ₹2,00,000 because you reported your loss correctly last year!

Section 7: Top Mistakes to Avoid (Read This Carefully!).

1. Using the Wrong ITR Form: The biggest mistake. If you use ITR-1, 2 or 4, your loss claim is invalid. Remember: F&O = ITR-3.
2. Missing the Deadline: If you file your ITR after the due date, you cannot carry forward your losses. The government is very strict about this. Even a one-day delay can cost you lakhs in future tax savings.
3. Ignoring a Mandatory Tax Audit: If an audit was required and you didn’t do it, you face a penalty and the tax officer can disallow your loss claim.
4. Not Reconciling with AIS: The tax department’s Annual Information Statement (AIS) has all the data from your broker. If your ITR doesn’t match the AIS, you will get a notice. Always check your AIS before filing.
5. Forgetting to Claim Expenses: Every expense you forget to claim makes your loss look smaller (or your profit look bigger), meaning you pay more tax. Keep a record of all your trading-related expenses.

FAQ: Answering Your Most Common Questions.

Q1: I have an F&O loss and only salary income. Do I still need a tax audit?
A: Yes. Even though you can’t set off the loss against your salary, the rule for a tax audit still applies. If you have an F&O loss and your salary is above the basic tax-free limit, an audit is mandatory to carry the loss forward.

Q2: Do I need a CA to file ITR-3?
A: If a tax audit is not mandatory for you, you can technically file ITR-3 yourself. However, it is a complex form. If you are not confident, it is highly advisable to hire a CA to avoid mistakes. If an audit is mandatory, you must hire a CA anyway.

Q3: What if I have F&O profit but a loss from shares (Capital Loss)?
A: You can set off a Short-Term Capital Loss against your F&O profit. However, a Long-Term Capital Loss can only be set off against a Long-Term Capital Gain. You cannot set it off against F&O profit.

Q4: My broker’s turnover report is different from my manual calculation. What should I do?
A: Always follow the method prescribed by the Income Tax Act (absolute profit for futures; absolute profit + sale premium for options). Sometimes, brokers calculate it differently. The tax department will follow the official method.

Q5: What is the due date for filing ITR-3 for AY 2025-26?
A:

• If a tax audit is not required: July 31, 2025.
• If a tax audit is required: October 31, 2025.

(Always check the official portal for any last-minute extensions).

Conclusion: Turn Your Loss into a Winning Strategy.

Tax filing for F&O traders can feel like a maze. But as you’ve seen, it’s a process that can be understood with a little patience. By thinking of your F&O activity as a business, calculating your turnover correctly, choosing the right ITR form, and meticulously reporting your numbers, you are not just following the law—you are playing a smart financial game.

Your F&O loss is not a failure. It is a valuable asset that can act as a tax shield for years to come. File your return correctly and on time. Take control of your finances, and let this year’s loss become the foundation for next year’s tax-efficient profits.

Disclaimer

The information provided in this article is for general informational and educational purposes only. It is not intended as, and should not be construed as, professional tax, legal, or financial advice. Tax laws are complex and subject to change, and their application can vary widely based on the specific facts and circumstances. You should consult with a qualified professional, such as a Chartered Accountant, for advice tailored to your individual situation before making any decisions based on this information. The author and publisher of this article assume no liability for any errors or omissions in the content, or for any actions taken in reliance on the information provided herein.

C.K. Gupta

Hello, I am C.K. Gupta Founder of Taxgst.in, a seasoned finance professional with a Master of Commerce degree and over 20 years of experience in accounting and finance. My extensive career has been dedicated to mastering the intricacies of financial management, tax consultancy, and strategic planning. Throughout my professional journey, I have honed my skills in financial analysis, tax planning, and compliance, ensuring that all practices adhere to the latest financial regulations. My expertise also extends to auditing, where I focus on maintaining accuracy and integrity in financial reporting. I am passionate about using my knowledge to provide insightful and reliable financial advice, helping businesses optimize their financial strategies and achieve their economic goals. At Taxgst.in, I aim to share valuable insights that assist our readers in navigating the complex world of taxes and finance with ease.