Income Tax Update | ITR-3 Utility Released

For taxpayers engaged in Futures & Options (F&O) trading, ITR-3 is generally the applicable return form because F&O income is treated as non-speculative business income under the Income Tax Act.

Key Changes Highlighted for AY 2026-27

1. Separate Disclosure of F&O and Intraday Transactions

• F&O turnover must be reported separately.
• Intraday trading should not be clubbed with F&O transactions.

2. F&O Income = Non-Speculative Business Income

Report F&O profit or loss under Profits & Gains from Business or Profession (PGBP)

Examples:

• Equity Futures
• Stock Futures
• Index Futures
• Options Trading

3. Intraday Trading = Speculative Income

Intraday equity trading profits/losses must be disclosed separately as: Speculative Business Income

This is different from F&O income.

4. Buyback Capital Loss Disclosure

A dedicated disclosure field has been introduced for reporting capital losses arising from buyback-related transactions.

5. GST Turnover Reconciliation

If GST registration exists, turnover disclosed in GST Returns, Books of Accounts, ITR-3, should be properly reconciled to avoid scrutiny.

AI-Based Tax Scrutiny

The Income Tax Department increasingly uses data analytics and AI tools to compare AIS (Annual Information Statement), TIS (Taxpayer Information Summary), Form 26AS, Broker Trade Reports, TDS Data, GST Returns, Bank Transactions, Books of Accounts and Even small mismatches may result in notices or scrutiny.

Major Change for F&O and Intraday Traders

For AY 2026-27, the revised ITR-3 requires:

• Separate reporting of futures & options turnover.
• Separate disclosure of F&O income/profit or loss.
• Reporting under Schedule Part A – Trading Account.
• Similar reporting requirements for intraday trading activities.

The objective is to improve transparency and enable better tracking of derivative transactions.

Important for F&O Traders

Many taxpayers incorrectly file ITR-4 for F&O transactions. Since F&O income is generally treated as non-speculative business income, such taxpayers are usually required to file ITR-3, subject to the applicable provisions of the Income-tax Act.Failure to provide the newly prescribed turnover and income details may result in the return being treated as defective and could lead to notices from the Income Tax Department.

How to Calculate F&O Turnover

For F&O transactions, turnover is not the contract value.

Absolute Turnover Method

Turnover =

• Sum of all favorable differences (profits)

• Sum of all unfavorable differences (losses)

Example

Turnover = ₹40,000 + ₹25,000 + ₹15,000

Total Turnover = ₹80,000

Incorrect turnover calculation may affect Tax Audit applicability, Presumptive taxation eligibility and Compliance reporting

Common Mistakes Made by F&O Traders

• Reporting F&O Income as Capital Gains 

• F&O income is generally business income, not capital gains.

• Using Net Profit as Turnover

• Turnover should be calculated using the absolute profit/loss method.

• Reporting Intraday Income as Capital Gains

• Intraday equity trading is speculative business income.

• Filing ITR-2 Instead of ITR-3 

• Active F&O traders normally need to file ITR-3.

• Ignoring AIS/TIS Reconciliation 

• Broker statements should match with AIS, TIS, Form 26AS, and Books of accounts.

Important Records to Maintain

• Maintain separate records for F&O Trading, Intraday Trading, Delivery-Based Equity Investments, Buyback Transactions and Freelance/Business Income (if any)

• Reconcile Periodically Broker Ledger,  Trade Summary,  Contract Notes,  Bank Statement, AIS/TIS,  Form 26AS and GST Returns (if applicable)

Loss Set-off Rules

F&O Loss (Non-Speculative)

Can be set off against:

• Business Income
• Salary (not allowed)
• Capital Gains (not allowed directly)

Can be carried forward for 8 assessment years subject to timely filing of return. 

Intraday Loss (Speculative)

Can be set off only against: Speculative Income

Carry forward allowed for 4 assessment years.

Due Date for AY 2026-27

Generally, for non-audit cases, the due date is 31 July 2026.