Conceptual · Article 8.1.1

Stock Futures.

Leverage That Cuts Both Ways — and a Tax Bill Most Traders Never See Coming.

Published as on 22 July 2026

A stock future is an exchange-traded contract to buy or sell one lot of a listed company's shares at a fixed price on a future expiry date, traded on NSE and BSE in the F&O segment. You control a ₹15–20 lakh position with only ₹2–4 lakh of margin — leverage that amplifies both gains and losses, marked to market every single day. Since October 2019, any position carried to expiry is settled by physical delivery of shares. And here is the part the brokerage ads omit: for tax, every rupee of profit or loss is non-speculative business income taxed at your slab rate — not capital gains. SEBI's own data shows 93% of individual F&O traders lose money.

93%

Individual F&O Traders Lose

₹15–20 L

Min Contract Value

15–30%

Margin of Notional

Slab Rate

Tax · Business Income

Executive Summary · Page 2

Executive Summary · 6 Findings

A stock future is a standardised bet on a single company's share price, sized in lakhs but funded in a fraction of that — which is exactly what makes it powerful for hedgers and dangerous for everyone else. It answers a real need: how do I hedge, or take leveraged directional exposure, without buying the full shareholding? The catch is that leverage magnifies mistakes, margin calls arrive at the worst moments, and the tax code treats your trading as a business — with all the compliance that implies.

Covers what a stock future is and how it is priced by cost of carry, how leverage and SPAN+ELM margin work, the daily mark-to-market and margin-call mechanism, physical delivery at expiry and the escalating delivery margins, the SEBI loss data every aspiring trader must read, the non-speculative business-income tax treatment and ITR-3 requirement, loss set-off and carry-forward rules, turnover and Section 44AB audit thresholds, legitimate uses versus speculation, and six questions Indian investors ask.

Key Findings

A leveraged, exchange-traded bet on one company.

A stock future is a standardised contract to buy or sell one lot of a specific listed company's shares at a set price on a fixed expiry (the last Thursday of the month), traded on NSE and BSE. Under SEBI's November 2024 reforms, one lot carries a contract value of ₹15–20 lakh. Its fair price tracks the cost of carry — spot plus financing minus expected dividends.

You post 15–30% margin — and it is marked to market daily.

You do not pay the full contract value. You deposit SPAN margin (a 99% VaR initial margin) plus Extreme Loss Margin — together roughly 15–30% of notional, or ₹2.25–4.5 lakh on a ₹15 lakh contract. Every day your account is adjusted for gains and losses; if it falls below maintenance, a margin call must be met immediately or the position is squared off.

SEBI's verdict: 93% of individual traders lose.

SEBI's September 2024 study found 93% of individual F&O traders incurred net losses over FY22–FY24, with aggregate losses above ₹1.8 lakh crore. In FY25 those losses rose 41% to ₹1.06 lakh crore — about ₹1.1 lakh per losing trader. Profits were concentrated in algorithmic and proprietary desks. This is exchange data, not opinion.

Taxed as business income — never capital gains.

Under Section 43(5)(d), exchange-traded derivatives are non-speculative business income under PGBP, taxed at your slab rate (up to 30% plus cess) regardless of holding period. There is no LTCG concession. A salaried trader must file ITR-3 — even for a single trade, and even in a loss year. Getting the form wrong is a common compliance error.

Losses set off against everything but salary.

A non-speculative F&O loss can be set off in the same year against any head except salary — including capital gains, rental and other income. Unadjusted losses carry forward eight years, but only against business income, and only if you file your return on or before the due date. Late filers permanently forfeit the carry-forward.

Physical delivery at expiry — and a tax audit trigger.

Since October 2019, positions held to expiry settle by physical delivery: buyers pay full value for shares, sellers must deliver them or face auction premiums. Escalating delivery margins run from 10% at E-4 to 70% at E-1. A Section 44AB tax audit may apply once F&O turnover (absolute profits plus absolute losses) crosses ₹1 crore.

At A Glance

Metric	Value	Detail
Instrument	Single-stock future	NSE / BSE F&O
Contract value	₹15–20 lakh	Per lot (Nov 2024)
Margin	15–30%	SPAN + ELM
Expiry	Last Thursday	Monthly
Settlement	Physical	Since Oct 2019
STT (sell)	0.02%	Since 1 Oct 2024
Tax	Slab rate	Business income, ITR-3
Best use	Hedging / discipline	Not casual speculation

Exhibit 01: The Leverage Multiplier (₹15L lot, ₹3L margin)

Underlying move	P&L on lot	On ₹3L margin
+5%	+₹75,000	+25%
−5%	−₹75,000	−25%
−10%	−₹1,50,000	−50%
−20%	−₹3,00,000	−100%

*Illustrative, assuming ~20% margin on a ₹15 lakh contract. A 5% move in the stock is a 25% move on deployed capital; a 20% adverse move wipes out the entire margin. Leverage is symmetric — it magnifies losses exactly as fast as gains, which is why most retail traders are on the wrong side of it.

The Opening · Page 3

The Opening

A stock future is the simplest of the derivatives and, for retail investors, the most quietly hazardous. It is a promise: to buy or sell a fixed number of shares of one company — a single lot — at an agreed price on a fixed near date. Nothing changes hands today except margin. Buy one lot of a ₹1,500 stock at a lot size of 1,000 shares and you have taken on ₹15 lakh of exposure while parking perhaps ₹3 lakh. That gearing is the whole point, and the whole danger. Most traders never hold to expiry; they square off before the last Thursday and settle the price difference. Those who do carry to expiry take or give physical delivery of shares.

"Leverage does not change the odds of being right. It only changes the cost of being wrong. A 5% move you would shrug off in cash equity becomes a 25% swing on margin — and the market gets to decide the timing, not you."
Symmetric Risk, Asymmetric Regret

The mechanics. A future's fair value is anchored to the spot price by the cost of carry: futures ≈ spot × (1 + risk-free rate × time) − expected dividends. The gap between futures and spot — the basis — narrows to zero at expiry. In between, the price moves with the underlying, and your margin account is trued up daily. A position moving against you erodes that margin; cross the maintenance line and your broker issues a call you must meet at once or be closed out.

The FY 2025-26 context. SEBI has spent the last two years trying to cool retail F&O: the minimum contract value was tripled to ₹15–20 lakh in November 2024, and the securities transaction tax on the sell side rose to 0.02% from 1 October 2024. Both reforms respond to the same finding — that the overwhelming majority of individual participants lose money — and both raise the cost of casual speculation.

The Honest Boundary: A stock future is NOT a cheaper way to own shares — it expires, pays no dividend to you, and demands margin top-ups. It is NOT a lottery ticket for tips and finfluencer calls — SEBI's data is unambiguous. It IS a precise tool for hedging a concentrated holding, and for experienced, disciplined traders with hard risk limits and capital to survive adverse mark-to-market. Everyone else should read the loss data first.

Structure

Part I

What a Stock Future Is, How It's Priced & How It's Used

Part II

Leverage, Margin, Physical Delivery & the SEBI Loss Data

Part III

Costs & Tax: STT, Business Income, ITR-3 & Set-Off

Part IV

The Verdict: A Scalpel, Not a Slot Machine

Use If

✓ Hedging a large-cap holding

✓ Experienced, with strict stop-losses

✓ Capital to absorb MTM swings

✓ You understand the ITR-3 duty

Do NOT Use If

✕ New to markets

✕ Trading on tips or finfluencer calls

✕ Undercapitalised for margin calls

✕ Unaware it creates business income

Part I

What a Stock Future Is, How the Price Is Set, and How Investors Use It

The anatomy of a single-lot contract on one listed company; how the cost-of-carry relationship anchors the futures price to spot and the basis converges at expiry; and the four real uses — hedging, leveraged direction, arbitrage and pair trading.

Part I · Page 4

Anatomy of a Contract

Element	What It Means
Underlying	One listed stock (e.g. Reliance, Infosys, TCS)
Lot size	Fixed shares per contract, set by NSE/BSE
Contract value	Lot × futures price — ₹15–20 lakh target
Expiry	Last Thursday of the contract month
Settlement	Physical delivery if held to expiry

As a stock's price rises, NSE periodically cuts the lot size to keep contract value inside the ₹15–20 lakh band. A ₹1,500 stock with a 1,000-share lot is worth ₹15 lakh; if it doubles, the lot may be halved to ~500 shares.

How the Price Is Set

Cost of Carry

Futures price ≈ spot × (1 + risk-free rate × time to expiry) − expected dividends. The premium of futures over spot reflects the financing cost of holding shares to expiry; near dividend record dates futures can trade at a discount, as the payout lowers the settlement price. The basis — futures minus spot — converges to zero as expiry approaches.

The Four Real Uses

Use	How It Works
Hedging	Short futures against a held stock to offset a fall
Directional	Leveraged long/short view on the stock
Arbitrage	Cash-futures spread when the basis is rich
Pair trade	Long one stock, short a sector peer

The most defensible use for a long-term investor is hedging: hold 1,000 shares, expect short-term turbulence, sell one lot of futures. If the stock falls, the short profits and offsets the paper loss — without selling the shares and triggering capital gains. Cash-futures arbitrage and pair trades are largely the domain of institutional and algorithmic desks.

Appropriate uses: hedging a concentrated large-cap position through a volatile earnings season; a disciplined trader expressing a defined-risk directional view; an institution running structured arbitrage. Inappropriate: a first-time investor chasing a "sure-shot" tip with borrowed conviction and leveraged capital — the fastest route into the SEBI loss statistic.

Part II

Leverage, Margin, Physical Delivery, and the Loss Data Every Trader Must Read

Why SPAN and Extreme Loss Margin let you control lakhs with a fraction of it; how daily mark-to-market turns a paper loss into a same-day cash call; what physical delivery means at expiry; and what SEBI found when it counted the winners and losers.

Part II · Page 6

Margin & the Daily Truth

SPAN + ELM — The Two Layers

SPAN (initial) margin is set by NSE Clearing's 99% Value-at-Risk model over a 2-day horizon. Extreme Loss Margin adds the higher of 5% of notional or 1.5 standard deviations of the stock's daily returns. Together with any ad hoc margin, the total typically runs 15–30% of contract value — roughly ₹2.25–4.5 lakh on a ₹15 lakh lot.

Mark-to-Market — The Overlooked Mechanism

Your account is settled every day for unrealised gains and losses. A position "right in the long run" can still trigger a margin call in the short run. Miss the top-up and you are squared off — often at the worst possible moment, crystallising the loss you were trying to ride out.

Physical Delivery — Escalating Margins

Since October 2019, positions held to expiry settle physically. Any contract within 5% of spot near expiry (CTM) triggers step-up delivery margins: 10% at E-4, 25% at E-3, 45% at E-2, 70% at E-1. Fail to deliver shares and the broker buys them at auction — often at a punishing premium.

Delivery Margin Ladder

Days to expiry	Delivery margin
E-4	10% of contract value
E-3	25% of contract value
E-2	45% of contract value
E-1	70% of contract value

The practical rule: set an alert and square off open positions well before the expiry session unless you genuinely intend to give or take delivery.

What SEBI Found (FY22–FY24)

The Data, Not the Marketing

93% of individual F&O traders lost money over three years; aggregate losses topped ₹1.8 lakh crore. In FY25 alone, retail losses rose 41% to ₹1.06 lakh crore — about ₹1.1 lakh per losing trader. Profits were overwhelmingly concentrated in algorithmic and proprietary desks (96–97% of FPI and prop profits).

Read this as a signal, not a dare. The losers are not all reckless; many are disciplined people meeting a machine on the other side of the trade. If your edge is not clearly definable, the base rate says you are the liquidity, not the winner.

Part III

Transaction Costs and the Tax Rule That Reclassifies You as a Business

STT and the round-trip cost stack; why every F&O rupee is non-speculative business income at your slab rate; the mandatory ITR-3; how losses set off against everything but salary and carry forward eight years; and the turnover-based Section 44AB audit trigger.

Part III · Page 8

The Cost Stack

Charge	Rate	Side
STT	0.02%	Sell only
Exchange txn	~0.0019%	Both
SEBI fee	0.0001%	Both
Stamp duty	0.002%	Buy
GST 18%	On brokerage/charges	Both

STT on the sell leg rose to 0.02% from 1 October 2024 — ₹300 on a ₹15 lakh sell, up from ₹187.50. A full round trip on that contract runs roughly ₹700–900 in STT and exchange charges before brokerage. Small per trade; heavy for active traders. The consolation: because F&O is a business, all these costs are deductible.

The Core Rule

Non-Speculative Business Income

Under Section 43(5)(d), exchange-traded derivatives are excluded from speculative transactions. F&O income is therefore not capital gains and not speculative — it is non-speculative business income under PGBP, taxed at your slab rate. A 30% bracket trader pays more than twice the 12.5% LTCG rate on the same rupee of profit.

Slab Rates (New Regime, FY 2025-26)

Taxable income	Rate
Up to ₹4L	Nil
₹4L–₹8L	5%
₹8L–₹12L	10%
₹12L–₹16L	15%
₹16L–₹20L	20%
₹20L–₹24L	25%
Above ₹24L	30%

Plus 4% cess. Section 87A rebate makes income up to ₹12 lakh effectively tax-free under the new regime. F&O gains stack on top of your other income at these rates.

ITR-3, Set-Off & Carry-Forward

ITR-3 is mandatory — salaried traders cannot use ITR-1/2. F&O losses set off in-year against any head except salary (including capital gains and rental), and carry forward 8 years against business income only — but only if the return is filed on time.

Turnover & Section 44AB Audit

Turnover = sum of absolute profits + absolute losses (not gross contract value). A tax audit applies once turnover exceeds ₹1 crore (or ₹10 crore where 95%+ of flows are digital). Even below the threshold, an audit helps substantiate carried-forward losses. A CA experienced in F&O is advisable.

Part IV

The Verdict

A scalpel in trained hands. A slot machine in most others.

Part IV: The Verdict · Page 10

30-Second Summary

A stock future is a leveraged, exchange-traded contract on one company's shares — one lot worth ₹15–20 lakh, held on 15–30% margin, priced by cost of carry, and marked to market every day. It is genuinely useful for hedging a concentrated holding and for disciplined, well-capitalised traders. But leverage is symmetric: a 20% adverse move can erase your entire margin, and margin calls arrive on the market's schedule, not yours. Since October 2019, positions carried to expiry settle by physical delivery.

The tax code treats your trading as a business: every gain or loss is non-speculative business income under Section 43(5)(d), taxed at your slab rate (up to 30%), reported on ITR-3 — never as capital gains. Losses set off against any head but salary and carry forward eight years, provided you file on time; a Section 44AB audit can apply above ₹1 crore of turnover. And over it all sits SEBI's finding: 93% of individual F&O traders lose money. The instrument is not the problem. Casual use of it is.

"Ask two questions before you place the trade. Can I define my edge, or am I the liquidity someone else is harvesting? And can my capital — and my compliance — survive being wrong at the worst possible time? If either answer is shaky, the SEBI data has already written your outcome."
The Final Orientation

The Bottom Line: Use stock futures as a hedging tool or a disciplined, defined-risk trading instrument — never as a leveraged bet on a tip. Size positions so a margin call cannot force you out; diarise expiry to avoid unwanted physical delivery; and treat the tax as what it is — business income on ITR-3, with deductible costs, set-off against everything but salary, and carry-forward that depends on filing on time. Above all, respect the base rate: most individual F&O traders lose money. Verify current lot sizes, margins and slab rates before you trade, and engage a CA if your turnover is material.

ADWIZR · July 2026

Decision Rules

Use Correctly As

✓ A hedge on a large-cap holding

✓ A defined-risk, stop-loss trade

✓ An institutional arbitrage/pair leg

✓ Business income you report on ITR-3

Misuse Destroys Value

✕ Leveraged bets on tips

✕ Undercapitalised, no stop-loss

✕ Carrying to expiry by accident

✕ Filing ITR-1/2 to "keep it simple"

Three Misconceptions

What Traders Get Wrong

(1) "Futures are a cheap way to own the stock." They expire, pay you no dividend, and demand daily margin. (2) "My F&O gains are capital gains." No — business income at slab rate, up to 30%. (3) "I can carry my loss forward anyway." Only if you file on time; late filers forfeit it permanently.

vs Owning the Shares

Leverage & Expiry vs Ownership

Stock futures: leveraged, expiring, marked to market, taxed as business income. Cash equity: fully paid, perpetual, receives dividends, taxed as capital gains with LTCG concessions. Different tools — one for tactical hedging and trading, the other for long-term ownership.

93%

Individuals lose

SEBI FY22–FY24

15–30%

Margin

SPAN + ELM

Slab

Business income

ITR-3, no LTCG

Investor FAQ

Questions Indian Investors Ask

Six questions, answered directly.

Investor FAQ · Page 12

Frequently Asked Questions

Q1 Are stock futures profits taxed as capital gains?

No. Under Section 43(5)(d) of the Income Tax Act, exchange-traded derivatives are excluded from speculative transactions and treated as non-speculative business income under Profits and Gains from Business or Profession. Stock futures gains are added to your total income and taxed at your applicable slab rate (up to 30% plus cess) regardless of holding period — no concessional capital gains rate applies. This is materially worse than equity held over 12 months, where LTCG is 12.5% above ₹1.25 lakh.

Q2 Do I need to file ITR-3 if I am salaried and also trade stock futures?

Yes. Any F&O activity — even a single occasional trade, and whether you made a profit or a loss — creates business income, so ITR-3 (Profits and Gains from Business or Profession) is mandatory for that year. Salaried individuals who trade F&O cannot use ITR-1 or ITR-2. Using the wrong form is a common and avoidable compliance error.

Q3 Can I set off my stock futures losses against my salary income?

No. Non-speculative F&O business losses cannot be set off against salary income under Section 71. They can, however, be set off in the same year against income from any other head — other business income, capital gains (both STCG and LTCG), rental income and other income. Unadjusted losses carry forward for up to 8 years but only against business (PGBP) income, and only if you file your return on or before the due date.

Q4 What happens if I forget to square off before expiry?

It goes to physical delivery, which has been mandatory for stock futures since October 2019. A buyer must pay the full contract value to receive shares in demat; a seller must deliver the shares from demat, and if they are missing the broker procures them in the auction market — often at a steep premium that can exceed the original profit or loss. Escalating delivery margins (10% at E-4 rising to 70% at E-1) apply near expiry, so always square off in advance if you do not intend to give or take delivery.

Q5 How much margin do I need to trade one lot?

You post a fraction of the contract value, not the full ₹15–20 lakh. Total margin — SPAN (initial margin from NSE Clearing's 99% VaR model) plus Extreme Loss Margin (the higher of 5% of notional or 1.5 standard deviations of daily returns) plus any ad hoc margin — typically runs 15% to 30% of contract value depending on the stock's volatility. On a ₹15 lakh contract that is roughly ₹2.25–4.5 lakh. Your position is marked to market daily, and a move against you can trigger a margin call you must meet immediately or be squared off.

Q6 Do most retail traders make money in stock futures and F&O?

No. SEBI's September 2024 study found that 93% of individual F&O traders incurred net losses over FY22–FY24, with aggregate losses exceeding ₹1.8 lakh crore over three years. In FY25 retail F&O losses rose 41% to ₹1.06 lakh crore, averaging about ₹1.1 lakh per losing trader. Profits were concentrated in algorithmic and proprietary desks. The data is a direct signal that directional retail speculation in F&O overwhelmingly destroys value.

Key Terms & Definitions

Stock Future

A standardised, exchange-traded contract to buy or sell one lot of a specific listed company's shares at a set price on a fixed expiry (the last Thursday of the month), traded on NSE and BSE in the F&O segment. Since October 2019, positions held to expiry are settled by physical delivery.

SPAN & Extreme Loss Margin

SPAN margin is the initial margin computed by NSE Clearing's 99% Value-at-Risk model over a 2-day horizon. ELM is an additional buffer — the higher of 5% of notional or 1.5 standard deviations of the stock's daily returns. Together they usually total 15–30% of contract value.

Mark-to-Market (MTM)

The daily settlement of a futures position's unrealised gains and losses against the margin account. A position moving against you erodes margin; if the balance falls below maintenance, a margin call must be met immediately or the broker squares off the position.

Physical Settlement

The delivery of actual shares at expiry, mandatory for stock futures since October 2019. Buyers pay full contract value and receive shares in demat; sellers deliver shares or face auction procurement at a premium. Escalating delivery margins apply from E-4 (10%) to E-1 (70%).

Non-Speculative Business Income

The tax classification of exchange-traded F&O gains and losses under Section 43(5)(d), reported under PGBP and taxed at the investor's slab rate. It is neither capital gains nor speculative income, and requires filing ITR-3.

Cost of Carry

The pricing relationship that anchors a future to spot: futures ≈ spot × (1 + risk-free rate × time) − expected dividends. The basis (futures minus spot) reflects financing cost and dividend expectations and converges to zero at expiry.