Capital Gains, F&O & Commodity Trading Tax — AY 2026-27

If you've sold some mutual fund units this year, booked profit on a few stocks, or dabbled in futures and options trading alongside your regular job, you've probably already discovered something frustrating: these aren't all taxed the same way. A profit from a stock you held for two years is taxed completely differently from a profit on the same stock sold after two weeks — and your F&O gains are taxed differently again, under a completely different head of income altogether.

This confusion is genuinely common, and it isn't your fault. The rules genuinely are different for each category, and getting them mixed up is one of the most frequent reasons people either overpay, underpay, or end up with a mismatch notice after filing. This guide walks through equity and mutual fund capital gains, and F&O trading income, exactly as they apply for FY 2025-26 (AY 2026-27).

Capital gains on equity shares and equity mutual funds

For listed shares and equity-oriented mutual funds (funds with at least 65% of their portfolio in domestic equity), the dividing line is how long you held the investment.

Short-term capital gains (STCG) — If you sell within 12 months of purchase, the gain is short-term. Under Section 111A, this is taxed at a flat 20%, provided Securities Transaction Tax (STT) was paid on the sale. This is a special rate, separate from your regular income tax slab, and most Chapter VI-A deductions (like 80C or 80D) cannot be claimed against it.

Long-term capital gains (LTCG) — Hold for more than 12 months, and the gain becomes long-term. Under Section 112A, LTCG on equity and equity mutual funds is taxed at 12.5%, but only on the amount exceeding ₹1.25 lakh in a financial year. The first ₹1.25 lakh of LTCG in a year is exempt. There's no indexation benefit available on this 12.5% rate.

A practical example: if you book ₹1.10 lakh LTCG on one set of shares and another ₹60,000 LTCG on a different holding later in the year, your total equity LTCG for the year is ₹1.70 lakh. The first ₹1.25 lakh is exempt, and you pay 12.5% only on the remaining ₹45,000.

Debt mutual funds work differently. For units purchased on or after 1 April 2023, there is no LTCG concept at all — every gain, regardless of how long you held the units, is taxed as short-term, at your applicable slab rate. If you're holding debt fund units bought before that date, the older long-term rules (12.5% after a 24-month holding period) still apply to those specific units.

Hybrid funds are taxed based on their actual equity allocation. If a hybrid scheme holds more than 65% in equity, it's taxed like an equity fund. Below that threshold, it generally follows the debt fund treatment.

One detail people often miss: capital gains are taxable under both the old and the new tax regime. Choosing a regime affects your slab-rate income and your deductions — it does not change the STCG or LTCG rates themselves.

Set-off rules: using losses to your advantage

Not every year is a profitable one, and the law does allow you to use capital losses sensibly.

• A short-term capital loss (STCL) can be set off against both short-term and long-term capital gains in the same year.
• A long-term capital loss (LTCL) can only be set off against long-term capital gains — it cannot reduce short-term gains.
• Capital losses, whether short-term or long-term, cannot be set off against your salary or other non-capital-gains income.
• Any loss you can't fully use in the current year can be carried forward for up to 8 assessment years, but only if you file your ITR on or before the due date. A belated return forfeits this carry-forward right entirely.

This last point is worth repeating because it trips up a lot of people: if you're sitting on capital losses this year and think you have nothing to file because you "made no profit," filing on time anyway is exactly what protects your ability to use that loss against future gains.

Futures and options (F&O) — including commodities: a different category altogether

This is where things genuinely diverge from how most people expect investment income to be taxed. F&O trading is not capital gains at all — under Section 43(5) of the Income Tax Act, it's classified as non-speculative business income, reported under "Profits and Gains of Business or Profession" (PGBP), not under capital gains.

This applies just as much to commodity derivatives — futures and options traded on MCX or NCDEX — as it does to equity and index F&O on NSE and BSE. People sometimes mentally file commodity trading as "something separate," but the law treats it identically: same Section 43(5) classification, same ITR-3 requirement, same turnover-based audit thresholds, and the same set-off and carry-forward rules described below. If you trade both equity F&O and commodities, their turnover is generally aggregated together for audit threshold purposes, so it's worth tracking both in one place rather than treating them as unrelated activities.

This single classification has several knock-on effects:

It's taxed at your slab rate, not a special rate. F&O profit gets added to your total income and taxed according to whichever slab you fall into under your chosen regime — there's no flat 20% or 12.5% rate here.

You need to file ITR-3, not ITR-1, ITR-2, or even ITR-4 on presumptive basis in most cases. A common and risky mistake is filing ITR-4 and claiming F&O profits under the presumptive taxation scheme without properly evaluating eligibility — this can trigger scrutiny.

Losses can be set off more flexibly, with one major exception. F&O losses (as non-speculative business losses) can be set off in the current year against almost any other income — including capital gains, both short-term and long-term — except salary income. Salary is specifically excluded under Section 71(2A). Unused losses can be carried forward for 8 assessment years, but only against future business income, and again, only if your return is filed by the due date.

Genuine business expenses are deductible. Brokerage, exchange transaction charges, SEBI turnover fees, internet and subscription costs related to trading, and even STT paid on F&O transactions can be claimed as deductions against your F&O income — something that has no equivalent on the capital gains side.

If you're a salaried employee with a meaningful F&O loss this year, don't assume it offsets nothing. It cannot touch your salary, but it can be set off against capital gains, rental income, or any other business income you may have in the same year.

Tax audit: when it applies to F&O traders

This is the part that catches people off guard, particularly those who think a tax audit is something only "real businesses" need to worry about.

Whether a tax audit under Section 44AB applies depends on your trading turnover, not your profit or loss. Turnover for F&O is calculated as the sum of absolute profits and losses across all your squared-off trades during the year — not the total value of contracts traded, which is a common point of confusion.

As a general guide for FY 2025-26:

• If your F&O turnover stays within ₹1 crore, audit is generally not required.
• Above ₹1 crore, audit may apply, though a higher threshold of ₹10 crore is available if at least 95% of your transactions are digital (which covers almost all retail trading today).
• Even within these limits, if you declare profit below 6% of turnover under presumptive taxation provisions and your total income exceeds the basic exemption limit, audit can still become applicable — this is true even in loss-making years, which is the scenario that surprises most people.

Given how technical the turnover calculation and audit-trigger conditions are, this is genuinely one of the areas where a small miscalculation can lead to a defective return notice or an audit requirement you didn't anticipate. It's worth having this specifically reviewed rather than assumed.

What's new in the ITR-3 form for AY 2026-27

If you've traded F&O before, the form itself has changed this year in a way that's worth knowing about before you file. The CBDT's revised ITR-3 form for AY 2026-27 introduces new columns under "Schedule Part A – Trading Account" that specifically require you to separately disclose your F&O turnover and your F&O income credited to the profit and loss account. These fields didn't exist in last year's form.

Tax professionals have flagged this clearly: leaving these new fields blank, rather than properly filling them in, can result in your return being treated as defective. A defective return that isn't corrected within the prescribed time can be treated as invalid, which puts your compliance status and any benefits tied to timely filing at risk. If you've used the same broker's tax P&L statement format from previous years to file, double-check that this year's data maps correctly onto the new schedule rather than assuming the old approach still works.

Bringing it together: a few practical habits

Reconcile against your broker's tax P&L statement and AIS before filing. Brokers now provide capital gains and F&O turnover statements, but discrepancies between what your broker reports and what shows up in your AIS or Form 26AS are a common trigger for notices. Catching a mismatch before you file is always easier than explaining it afterward.

Don't let small carelessness erase real tax benefits. Filing late doesn't just cost you a penalty — it can forfeit your ability to carry forward both capital losses and F&O business losses, sometimes worth far more than the late fee itself.

Treat F&O as the business activity it legally is, with proper books, accurate turnover tracking, and the awareness that it sits in an entirely different part of your return than your equity and mutual fund gains.

If your year included a mix of equity investments, mutual fund redemptions, and F&O trading, the interplay between these — what can be set off against what, which ITR form applies, and whether an audit is triggered — is genuinely easy to get wrong even with good intentions. This is exactly the kind of return that benefits from a professional review before submission, particularly with the new F&O disclosure requirements in play this year. Our income tax calculator on the homepage can also help you get a quick first sense of where your numbers stand before you sit down to file in detail.

One category we haven't covered here: intraday equity trading without delivery, which the law treats as speculative business income — a different classification from F&O, with its own, stricter set-off and carry-forward rules. If you trade intraday alongside F&O or capital gains, that distinction matters enough that it deserves its own detailed guide, which we'll be covering separately.