0.7 Tax and paperwork · M00 On-ramp

Motivation

Tax changes the after-tax result of every trade and decides which losses you can use. The rules differ sharply between delivery investing, intraday trading and F&O. This section states the rules as of 6 Nov 2026 for a resident individual; M01 · 1.8 has the same rules in brief. It is not tax advice: for anything beyond a simple year, use a chartered accountant.

0.7.1The legal frame#

The Income-tax Act, 2025 replaced the Income-tax Act, 1961 with effect from 1 Apr 2026. It uses "tax year" for the old "previous year"; classifications and rates were carried over, and sections were renumbered. The mapping below is taken from section comparison tables, including ICAI's published comparison of the two Acts; it was not checked against the Act's text for this module (verify before citing): STCG on STT-paid shares, old s.111A → s.196; LTCG on STT-paid shares, old s.112A → s.198; tax audit, old s.44AB → s.63; presumptive taxation, old ss.44AD/44ADA/44AE → s.58; rebate, old s.87A → s.156; advance tax → ss.404 and 408; the definition of speculative transaction, old s.43(5), reportedly → s.66. Rates and thresholds below are those reported as unchanged by the Budget of 1 Feb 2026. Examples ignore surcharge and the 4% health and education cess unless stated.

0.7.2What kind of income is it?#

Activity	Head and type	Rate (tax year 2026-27)
Listed shares and equity-oriented funds, held 12 months or less, STT paid	Short-term capital gain (STCG)	20%
The same, held more than 12 months	Long-term capital gain (LTCG)	12.5% on the year's total LTCG above ₹1.25 lakh
Intraday equity (bought and sold the same day, no delivery)	Speculative business income	Slab rates
F&O (futures and options, equity, commodity, currency)	Non-speculative business income	Slab rates
Dividends	Income from other sources	Slab rates (TDS above a threshold)
Debt funds (over 65% debt) bought on or after 1 Apr 2023	Capital gain, but taxed at slab rates whatever the holding period	Slab rates
Gold ETFs	STCG at slab rates; LTCG after 12 months	12.5%

Commodity derivatives on MCX are taxed like equity F&O: non-speculative business income at slab rates, with CTT (the commodity counterpart of STT) on the sell side. A commodity hedge or trade can therefore make business income while the portfolio it sits beside makes capital gains, and a capital loss cannot be set off against business income (M14 · 14.19 works the consequence for hedging). M10 · 10.14 gives the charges, the treatment of gold and silver ETFs and physical metal, and the sources.

The capital-gains rates have applied to transfers on or after 23 Jul 2024. Under the new regime for tax year 2026-27 (unchanged from 2025-26), the slabs are: up to ₹4 lakh nil; ₹4–8 lakh 5%; ₹8–12 lakh 10%; ₹12–16 lakh 15%; ₹16–20 lakh 20%; ₹20–24 lakh 25%; above ₹24 lakh 30% (Finance Act 2025 rates, reported unchanged by the Budget of 1 Feb 2026; verify). A rebate makes total income up to ₹12 lakh tax-free, but it does not apply to tax on special-rate capital gains.

Frequent delivery trading can be treated as a business rather than investment. Under the 1961 Act, CBDT Circular 6 of 2016 let a taxpayer choose to treat listed shares held more than 12 months as capital assets, consistently across years; the treatment you choose should be consistent and documented.

0.7.3Set-off and carry-forward#

Capital losses. A short-term capital loss can be set off against short- or long-term gains; a long-term loss only against long-term gains. Unabsorbed capital losses carry forward 8 years.
Speculative (intraday) losses can be set off only against speculative income, this year or in the next 4 years.
Non-speculative business (F&O) losses can be set off against any other income except salary, including speculative income and capital gains, and carried forward 8 years against business income.
Losses carry forward only if you file your return by the due date. A late return forfeits the carry-forward.

The asymmetry in rules 2 and 3 matters: an intraday loss cannot reduce the tax on an F&O profit, while an F&O loss can reduce the tax on an intraday profit or on capital gains.

0.7.4Turnover and tax audit#

A business must get its accounts audited if its turnover exceeds a threshold. For trading, "turnover" is not the value of contracts traded. The ICAI Guidance Note on Tax Audit (revised 2022) defines it for derivatives as the aggregate of favourable and unfavourable differences, that is, the sum of the absolute profits and losses of the individual trades; premium on options sold is included only where it is not already part of those differences (the 2022 revision removed the earlier double counting; verify the wording in the current edition of the guidance note). For intraday trades, turnover is likewise the sum of absolute differences.

\text{Turnover} = \sum_{\text{trades}} |\text{profit or loss}|. \tag{0.7}

Audit threshold (s.63 of the 2025 Act, old s.44AB): turnover above ₹1 crore, raised to ₹10 crore if cash receipts and cash payments are each at most 5% of the total. Trading through a broker and bank is non-cash, so the ₹10 crore limit is the relevant one for most traders.

Presumptive scheme caveat (s.58, old s.44AD): small businesses (turnover up to ₹2 crore, or ₹3 crore with at most 5% cash receipts) may declare a deemed profit of 6% of non-cash turnover without books. A taxpayer who opts in and then, within the next five years, declares a profit below the presumptive rate is barred from the scheme for five years, and under the old Act could then need an audit if total income exceeded the basic exemption. Whether and how this applies to F&O losses under s.63 of the new Act is disputed among tax practitioners (verify). If you have F&O losses and have ever used the presumptive scheme, get professional advice before filing.

Exercisem00_trader_tax.pyOpen in editor →

0.7.5Forms, dates and advance tax#

Return form. Any business income (intraday or F&O) requires ITR-3. Capital gains without business income: ITR-2. From assessment year 2025-26, ITR-1 and ITR-4 may be used if the only capital gain is LTCG on listed equity up to ₹1.25 lakh with no losses to carry forward (CBDT Notification 40/2025 of 29 Apr 2025; verify). The forms for tax year 2026-27 under the new Act had not been checked for this module.
Due dates. Under the 1961 Act the due date was 31 July for returns without audit and 31 October for audit cases; confirm the dates notified for tax year 2026-27.
Advance tax (ss.404 and 408): if your tax for the year, after TDS, is ₹10,000 or more, pay it in instalments: 15% by 15 June, 45% by 15 September, 75% by 15 December and 100% by 15 March (Income-tax Act 2025, ss.404 and 408; verify on the Income Tax Department's site). A salaried trader's employer deducts TDS only on salary; tax on F&O profits and capital gains must be paid as advance tax. Shortfalls attract interest. Under the old Act, a shortfall caused by a capital gain that arose after an instalment date did not attract interest if paid in the remaining instalments.

0.7.6Records#

Keep, for every year and for as long as any loss is being carried forward (and beyond the reassessment period):

every contract note (the legal record of each trade);
the broker's tax P&L and ledger for the year;
the depository CAS statements and mutual fund capital-gains statements from the RTAs (CAMS, KFintech);
your AIS (Annual Information Statement) and TIS (Taxpayer Information Summary) from the income-tax e-filing portal, which list the securities transactions, dividends and interest reported against your PAN, and Form 26AS for TDS. Reconcile the AIS with your records before filing, and use the portal's feedback option if it is wrong.

STT and stamp duty as costs STT is not deductible in computing capital gains, but it is an allowable expense in computing business income (intraday, F&O). Brokerage, exchange charges and stamp duty form part of the cost of acquisition or the expenses of transfer for capital gains, and are expenses for business income.

0.7.7Worked example: a mixed year#

Worked example 0.5

A resident individual under the new regime has, in tax year 2026-27:

Salary income of ₹18,00,000 after the standard deduction.
Delivery trades: STCG of ₹1,50,000 (shares held 5 months) and LTCG of ₹2,40,000 (held 20 months).
Intraday trades: profitable trades ₹70,000, losing trades ₹1,15,000, so a net speculative loss of ₹45,000.
F&O trades: profitable trades ₹6,20,000, losing trades ₹4,40,000, so a net non-speculative profit of ₹1,80,000 (after charges).

Step 1 (capital gains). No capital losses. STCG ₹1,50,000; LTCG ₹2,40,000.

Step 2 (business income). The speculative loss cannot be set off against the F&O profit. Business income is ₹1,80,000; the ₹45,000 speculative loss is carried forward for up to 4 years (only if the return is filed on time).

Step 3 (slab income). ₹18,00,000 + ₹1,80,000 = ₹19,80,000. Slab tax: $0 + 20{,}000 + 40{,}000 + 60{,}000 + 0.20 \times 3{,}80{,}000 = \text{₹}1{,}96{,}000$ .

Step 4 (capital gains tax). STCG: $0.20 \times 1{,}50{,}000 = \text{₹}30{,}000$ . LTCG: $0.125 \times (2{,}40{,}000 - 1{,}25{,}000) = \text{₹}14{,}375$ .

Step 5 (total). ₹1,96,000 + ₹30,000 + ₹14,375 = ₹2,40,375 before cess; with 4% cess, ₹2,49,990. The rebate does not apply (total income is above ₹12 lakh).

Turnover and audit. F&O turnover by (0.7) is ₹6,20,000 + ₹4,40,000 = ₹10,60,000; intraday turnover ₹1,85,000. Both are far below the audit threshold, and the F&O profit is 17% of turnover, above the 6% presumptive rate. No audit on these facts.

Paperwork. Business income means ITR-3. Tax on the salary alone would be ₹1,60,000, covered by the employer's TDS; the remaining ₹80,375 (plus cess) arises from trading and investing and is due as advance tax through the year.

Had the intraday and F&O results been reversed (intraday +₹1,80,000, F&O −₹45,000), the F&O loss would have been set off against the intraday profit, and business income would be ₹1,35,000: the same economic result taxed differently.