F&O trader shock: Why even your losses could trigger a ₹1.5 lakh audit penalty

Booked losses in F&O this year? Don’t assume you’re off the tax radar. If your turnover crossed ₹10 crore—even with zero profits—you could be staring at a mandatory tax audit and a hefty penalty.

Many retail traders wrongly believe that losses in futures and options mean no compliance headaches. But under Section 44AB of the Income Tax Act, it’s turnover—not profit—that decides whether you need a tax audit.

“Losses don’t shield you from audits,” warns Sujit Bangar, founder of TaxBuddy.com, in a recent LinkedIn post that’s rattling the F&O community.

F&O trading is considered non-speculative business income. That means it falls under “Profits & Gains of Business or Profession,” and traders must maintain books of accounts if certain thresholds are crossed.

The key number to watch? ₹10 crore. If your total turnover—calculated using the ICAI method—exceeds this, and your cash transactions are within 5%, a tax audit becomes mandatory. That’s true even if you made zero profits or booked a net loss.

Turnover here isn’t the contract value. It’s the sum of all favorable and unfavorable differences from squared-off trades, plus any option premium received (if not already included in your P&L).

Here’s how it works:

• Turnover > ₹1 crore: Audit required if cash receipts/payments >5%
• Turnover > ₹10 crore: Audit mandatory regardless of profit or loss, if cash % is ≤5%
• Miss audit deadline (September 30, 2025): Penalties can reach ₹1.5 lakh or more

Bangar cites the example of “Rajnish,” an F&O trader who booked losses but faced a ₹1.5 lakh penalty for missing audit requirements due to high turnover.

His advice: “Compute turnover correctly using ICAI guidelines, monitor your digital vs. cash transactions, and check if audit rules under 44AB apply. Don’t wait for a tax notice to learn the hard way.”