F&O Taxation 2026: How to Set Off Past Losses Under the Presumptive Scheme (Section 44AD)

By FnOTax India Editorial Board · Updated 2026-05-29 · F&O Loss

Source basis: This research draft is checked against listed official sources where available. It is educational guidance, not personalized tax advice.

F&O Taxation 2026: How to Set Off Past Losses Under the Presumptive Scheme (Section 44AD)

If you read most tax blogs today, you will walk away believing a dangerous myth: “If you opt for the presumptive taxation scheme under Section 44AD, you forfeit the right to set off your past trading losses.”

This is categorically false.

Consider this real question from an active trader: “Can’t do that, under presumptive scheme. Also, can I carry forward last year’s losses (FY 2023) for next year?”

The confusion stems from a fundamental misunderstanding of the Income Tax Act. There is a massive legal difference between declaring a current-year loss under the presumptive scheme (which is not allowed and triggers a tax audit) and setting off a valid, brought-forward loss from a previous year against your current-year presumptive profits (which is perfectly legal under Section 72).

Are you an active F&O trader confused about how “turnover” is calculated for Income Tax and when a Tax Audit under Section 44AB becomes mandatory? Have you been losing sleep over notices under Section 148A or 158BC because of mismatched turnover reporting?

This guide is the definitive, 2026-correct manual on how to calculate your F&O turnover, navigate the presumptive taxation scheme, and legally set off your past losses without triggering a tax audit.

The Big Myth: Presumptive Taxation vs. Brought-Forward Losses

Let’s clear the air immediately.

Under Section 43(5) proviso (d) of the Income Tax Act, trading in Futures and Options (F&O) on a recognized stock exchange is classified as non-speculative business income. (Note: Intraday equity without delivery remains speculative and is treated differently).

Because F&O is a normal business activity, Section 72 allows you to carry forward F&O losses for 8 assessment years and set them off against any business income in those future years.

Can you set off past losses against Section 44AD presumptive income? Yes. Section 44AD is simply a method of computing your current year’s business income (deeming it to be 6% of your digital turnover). Once that income is computed, the standard rules of set-off and carry-forward under Chapter VI of the Income Tax Act apply. You can absolutely deduct your brought-forward F&O losses (e.g., from FY 2023-24) from the 6% presumptive profit you declare in FY 2025-26.

The Crucial Distinction

  • What you CANNOT do: You cannot say, “I am opting for Section 44AD this year, but my presumptive profit is negative (a loss).” Section 44AD requires you to declare a minimum of 6% profit on digital turnover. If you want to declare a current-year loss, you must opt out of 44AD and get a tax audit under Section 44AB.
  • What you CAN do: You can say, “I am opting for Section 44AD this year. My turnover is ₹2 Crore. My deemed profit is 6% (₹12 Lakh). However, I have a brought-forward F&O loss of ₹5 Lakh from FY 2023-24. I will set that off against my ₹12 Lakh profit, making my net taxable business income ₹7 Lakh.”

Rule 1: The Prerequisite for Carrying Forward Losses

To utilize a loss from a previous year (like FY 2023-24), you must have strictly followed the rules in the year the loss was incurred.

  1. On-Time Filing (Section 139(1)): You must have filed your Income Tax Return for the loss-making year on or before the original due date. If you filed a belated return (after the deadline), your right to carry forward that business loss is permanently destroyed.
  2. Correct ITR Form: You must have declared the loss under the head “Profits and Gains of Business or Profession” using ITR-3.

If you met these conditions, your loss is safely parked in the Income Tax Department’s system, waiting to be absorbed by future profits.

Rule 2: Calculating F&O Turnover Correctly (The 2026 Standard)

Before you can decide whether to use the presumptive scheme or get an audit, you must calculate your turnover.

Warning: 90% of the articles on the web contain outdated turnover formulas. They will tell you to add the “premium received on the sale of options” to your turnover. Do not do this.

As per the authoritative ICAI 8th Edition Guidance Note on Tax Audit u/s 44AB (issued 19 August 2022), the formula for F&O turnover is strictly:

F&O Turnover = (Sum of Absolute Profits) + (Sum of Absolute Losses)

Absolute means you ignore the negative sign. A profit of ₹10,000 and a loss of ₹15,000 results in a turnover of ₹25,000. The premium received on options writing is already factored into the daily settlement profit/loss and is NOT added separately. Using the old method artificially inflates your turnover, potentially forcing you into an unnecessary tax audit.

Rule 3: Navigating the Presumptive Scheme (Section 44AD)

If your F&O turnover is relatively low, you can opt for the presumptive taxation scheme under Section 44AD to avoid maintaining detailed books of account and undergoing a tax audit.

  • The Threshold: Thanks to the Finance Act 2023 (effective FY 2023-24 onwards), the turnover limit for Section 44AD was raised from ₹2 Crore to ₹3 Crore, provided your cash receipts and cash payments do not exceed 5% of total receipts/payments. Since F&O trading is 100% digital, F&O traders easily qualify for the ₹3 Crore limit.
  • The Profit Rate: Because F&O transactions are entirely digital, you must declare a minimum profit of 6% of your total F&O turnover.

The 44AB(e) Trap: The 5-Year Lock-in

Section 44AD comes with a dangerous trap door: Section 44AD(4).

If you opt for the presumptive scheme in any given year, you are expected to stay in it for the next 5 years. If you opt out within those 5 years (for example, because you incurred a trading loss in the current year and want to claim it), you trigger Section 44AB(e).

Under Section 44AB(e), if you break the 5-year lock-in AND your total income exceeds the basic exemption limit, a Tax Audit becomes mandatory, regardless of your turnover. Furthermore, you are barred from re-entering the Section 44AD presumptive scheme for the next 5 assessment years.

Worked Example: Setting Off FY 2023-24 Losses in AY 2026-27

Let’s look at a real-world scenario to see how the mechanics of Section 44AD and Section 72 interact.

The Past (FY 2023-24):

  • Rahul incurred an F&O loss of ₹4,00,000.
  • He filed ITR-3 on time (before the July deadline), properly reporting the loss in Schedule BP and carrying it forward in Schedule CFL.

The Present (FY 2025-26 / AY 2026-27):

  • Rahul’s F&O Turnover (Absolute Profit + Absolute Loss) = ₹2,50,00,000 (₹2.5 Crore).
  • Since his turnover is under the ₹3 Crore digital limit, he opts for Section 44AD.
  • He declares a 6% presumptive profit: 6% of ₹2.5 Crore = ₹15,00,000.

The Set-Off:

  • Current Year Business Income (under 44AD): ₹15,00,000
  • Less: Brought Forward Loss from FY 23-24: (₹4,00,000)
  • Net Taxable Business Income: ₹11,00,000

Rahul successfully utilized his past losses while enjoying the compliance ease of the presumptive scheme in the current year. No tax audit is required.

Step-by-Step: How to Show Brought-Forward Losses in Your ITR

A common mistake traders make is trying to file ITR-4 when they have brought-forward losses.

While ITR-4 is the default form for the Section 44AD presumptive scheme, it does not contain the schedules required to set off past losses (Schedule BFLA and Schedule CFL).

If you have past F&O losses to set off, you must file ITR-3, even if you are declaring your current year income under the 44AD presumptive scheme.

Here is how to route it in ITR-3:

  1. Schedule BP (Business Profession): Enter your F&O turnover and declare your 6% profit under the specific section for presumptive income (Section 44AD).
  2. Schedule CYLA (Current Year Loss Adjustment): This schedule will automatically adjust any current-year losses from other heads (like house property) against your business income.
  3. Schedule BFLA (Brought Forward Loss Adjustment): This is the magic schedule. Your brought-forward F&O loss of ₹4,00,000 from FY 2023-24 will populate here and be subtracted from your current year’s presumptive profit.
  4. Schedule CFL (Carry Forward of Losses): If your past losses are greater than your current year profit, the unabsorbed balance will be carried forward to the next year in this schedule.

Tax Audit Thresholds & Books of Account (Section 44AA)

What if your turnover exceeds the presumptive limits, or you want to declare a profit lower than 6%?

Books of Account (Section 44AA)

You are legally required to maintain books of account if your business income exceeds ₹1.2 lakh OR your turnover exceeds ₹10 lakh in any of the last 3 years. For active F&O traders, maintaining a trading ledger, P&L statement, and bank statements is mandatory.

Tax Audit Applicability (Section 44AB)

If you do not use Section 44AD, the basic threshold for a tax audit under Section 44AB(a) is a turnover of ₹1 Crore.

However, the government raised this threshold to ₹10 Crore for businesses where cash receipts and cash payments each do not exceed 5% of total transactions. Because F&O trading is executed entirely through digital banking channels, the ₹10 Crore threshold effectively applies to all F&O traders.

You only need a tax audit if:

  1. Your F&O turnover (calculated via the absolute method) exceeds ₹10 Crore.
  2. OR, you trigger the 44AB(e) trap by opting out of the 44AD presumptive scheme within the 5-year lock-in period (and your total income exceeds the basic exemption limit).

Deadlines & Penalties for AY 2026-27

Traders often suffer from deadline anxiety, quoting fears like: “As per my understanding, I need to get audit & last date to file ITR for Audit cases is 15 Jan.”

Let’s correct the timeline for Assessment Year 2026-27 (Financial Year 2025-26):

  • ITR-3 Due Date (Non-Audit Cases): 31 August 2026. (Note: The Finance Act 2026 permanently extended the standard July 31 deadline to August 31).
  • Tax Audit Report Due Date (Form 3CA/3CB-3CD): 30 September 2026.
  • ITR-3 Due Date (Audit Cases): 31 October 2026.

The Cost of Missing an Audit (Section 271B)

If you are required to get a tax audit and fail to do so, the Income Tax Department will levy a fee under Section 271B.

  • The Fee: 0.5% of your total turnover OR ₹1,50,000, whichever is lower.
  • Update: The Finance Act 2026 converted this from a “penalty” to a “fee” status to reduce litigation, though the monetary amount remains unchanged. It is now automatically levied during processing.

Furthermore, mismatched turnover reporting or failing to audit when required is the leading cause of show-cause notices under Section 148A (income escaping assessment) and Section 158BC. Do not rely on guesswork; calculate your absolute turnover precisely.

Frequently Asked Questions (FAQs)

1. Can I set off brought-forward F&O losses from FY 2023-24 if I opt for the presumptive scheme (Section 44AD) this year? Yes. Section 72 allows you to set off validly carried-forward business losses against any business income in the next 8 years, including deemed profit declared under Section 44AD. You must use ITR-3 to claim this set-off.

2. Do I need to add the premium received on selling options to my F&O turnover? No. As per the ICAI 8th Edition Guidance Note on Tax Audit (August 2022), F&O turnover is strictly the sum of absolute profits and absolute losses. Premium received is no longer added separately.

3. What happens if I declare a loss under the presumptive scheme? You cannot declare a current-year loss under Section 44AD. If your actual profits are less than 6% or you have a loss, you must opt out of 44AD, maintain books of account, and undergo a mandatory tax audit under Section 44AB(e), provided your total income exceeds the basic exemption limit.

4. What is the due date to file my F&O tax return for AY 2026-27? For non-audit cases, the due date for ITR-3 is 31 August 2026 (extended via Finance Act 2026). For audit cases, the Tax Audit Report is due 30 September 2026, and the ITR-3 is due 31 October 2026.

5. Can I carry forward my F&O loss if I filed my ITR late last year? No. Under Section 139(3) read with Section 80, you must file your income tax return on or before the original due date (Section 139(1)) in the year the loss was incurred to be eligible to carry it forward.

Disclaimer: The information provided in this article is for educational and informational purposes only and does not constitute legal or tax advice. Tax laws are subject to change, and individual circumstances vary. Always consult with a qualified Chartered Accountant before filing your returns or making tax-related decisions.

Official sources

Source basis: The references below point to the official Indian tax sources used to inform this article. The article has not completed our full source-verification review; treat it as educational guidance only and consult a qualified Chartered Accountant before acting on it.