ITR-3 (Income Tax Return)

ITR-3 is the Income Tax Return form prescribed by the Central Board of Direct Taxes (CBDT) for individuals and Hindu Undivided Families (HUFs) who have income from profits and gains of business or profession. It is the form applicable to equity derivatives traders, intraday equity traders, freelancers, consultants, proprietors, and partners in a firm, among others. Where an investor also has capital gains income alongside business income, all income must be reported in a single ITR-3 return rather than splitting it across multiple forms.

ITR-3 is significantly more detailed than ITR-2 because it requires disclosure of business financials, including a profit and loss account, a balance sheet, and various business-specific schedules, in addition to the standard personal income and capital gains schedules.

Who must file ITR-3

ITR-3 is applicable to individuals and HUFs in any of the following situations:

1. Proprietorship business or profession, any individual running a sole-proprietorship firm, whether a manufacturer, trader, professional, or service provider.
2. F&O trading, individuals who trade equity futures and options, index futures and options, commodity futures (MCX), or currency derivatives. F&O income is classified as non-speculative business income under Section 43(5) of the Income Tax Act, irrespective of the frequency or volume of trading.
3. Intraday equity trading, intraday trades (positions opened and closed on the same day without delivery) are treated as speculative business income under Section 43(5). Taxpayers with intraday equity activity must file ITR-3 even if F&O trading is absent.
4. Partner in a firm, a partner who receives share of profit, salary, bonus, commission, or interest from a partnership firm must file ITR-3 (or ITR-5 for the firm itself).
5. Freelancers and consultants, professionals earning fees for consultancy, technical services, or any other professional activity.

A person who has both business income and capital gains from equity investments must include all sources in ITR-3. The capital gains schedules (Schedule CG and Schedule 112A) within ITR-3 are identical in structure to those in ITR-2 .

F&O income as business income

The classification of F&O income as business income has important tax consequences distinct from capital gains treatment:

• Loss set-off, F&O losses can be set off against other business income in the same year, and the unabsorbed balance can be carried forward for eight assessment years and set off against future business income.
• Expense deduction, brokerage, Securities Transaction Tax (STT) (if elected as a business expense), exchange fees, internet charges, software subscriptions, and advisory fees are deductible against F&O income.
• Speculative vs non-speculative, F&O is explicitly declared non-speculative by Section 43(5), which is significant because speculative losses can only be set off against speculative profits, whereas F&O losses can be set off against any other business income.
• Tax audit applicability, once turnover exceeds the prescribed threshold, a tax audit is required (see below).

F&O turnover computation

The concept of “turnover” for F&O trading is not the same as total notional value of contracts traded. CBDT guidance and the Institute of Chartered Accountants of India (ICAI) guidance note define F&O turnover as:

• Futures, the absolute value of profit or loss on each settled trade (i.e., the sum of settlement differences, both positive and negative, without netting).
• Options, the sum of absolute settlement profit/loss on exercised or lapsed positions, plus the total premium received on options sold.

Example: A trader executes the following futures trades in a financial year:

Turnover = Rs 25,000 + Rs 18,000 + Rs 12,000 = Rs 55,000 (not the sum of contract values).

Net profit = Rs 25,000 - Rs 18,000 + Rs 12,000 = Rs 19,000.

The distinction matters because the tax audit threshold is based on turnover, not on profit.

Presumptive taxation under Section 44AD

Section 44AD allows eligible businesses with turnover up to Rs 3 crore (increased from Rs 2 crore by the Finance Act 2023, subject to the condition that cash receipts do not exceed 5% of total receipts) to offer income on a presumptive basis at 8% of turnover (or 6% where the turnover or gross receipts are received by account payee cheque or electronic mode).

F&O traders cannot use Section 44AD, because the presumptive scheme applies to “eligible businesses” and the ICAI has clarified that speculative and derivative trading businesses are not eligible businesses for Section 44AD. This means that F&O traders must maintain accounts and compute actual income irrespective of their turnover level. Where their turnover exceeds the Section 44AB threshold, they must obtain a tax audit.

Tax audit requirement under Section 44AB

Section 44AB requires a taxpayer to obtain a tax audit from a practising Chartered Accountant if the turnover from business exceeds the prescribed threshold. For F&O traders, the relevant thresholds for AY 2025-26 are:

The last row is particularly relevant: where a trader has a net F&O loss and chooses to carry it forward, an audit is required even if turnover is below Rs 1 crore, because they are not offering income on a presumptive basis and they wish to avail the benefit of carry-forward under Section 70/71.

Tax Audit Report: Form 3CB and Form 3CD

The statutory tax audit is conducted by a Chartered Accountant who issues two forms:

• Form 3CB, the audit report, in which the CA certifies that the accounts give a true and fair view of the taxpayer’s affairs.
• Form 3CD, the statement of particulars, a detailed questionnaire covering items such as depreciation, payments to specified persons, compliance with TDS requirements, inventory valuation, related-party transactions, and any income or expenditure requiring special mention.

Both forms are filed electronically on the income tax portal by the CA. The tax audit report must be submitted on or before the due date for filing the ITR (typically 30 September for audit cases, though this is frequently extended).

Form structure

ITR-3 includes all the schedules of ITR-2 plus additional business-specific schedules. The principal schedules are:

Part A: General information

Same as ITR-2: PAN, Aadhaar, contact details, bank account, and tax regime election. Additionally requires details about the nature of business (using the NIC classification code) and whether accounts are maintained on cash or mercantile basis.

Part A-BS: Balance sheet

Assets and liabilities as at the end of the financial year. For proprietorship businesses, this is the proprietor’s balance sheet, including capital, reserves, loans, fixed assets, current assets, and current liabilities.

Part A-P&L: Profit and loss account

Revenue, direct costs, gross profit, indirect expenses, and net profit before tax. Interest, depreciation, rent, employee costs, brokerage, and other business expenses are listed here.

Schedule BP: Business income computation

Schedule BP bridges the profit and loss account to the taxable business income by adding back inadmissible expenses (such as personal expenses, income tax paid, and TDS), deducting items credited to P&L that are separately taxable (such as capital gains on business assets), and applying admissible deductions (such as depreciation under Section 32).

For F&O traders, Schedule BP is where the net F&O profit or loss is reported after deducting allowable expenses.

Schedule CG: Capital gains

Identical in structure to ITR-2’s Schedule CG. F&O traders who also hold equity investments for capital gains purposes report those gains separately in Schedule CG. The losses in Schedule CG cannot ordinarily be set off against Schedule BP income.

Schedule 112A: Scrip-wise LTCG disclosure

Identical to ITR-2’s Schedule 112A. Required for every long-term capital gains transaction on listed equity shares or equity-oriented mutual funds where Section 112A applies.

Schedule OS: Income from other sources

Dividends, interest, and miscellaneous income not forming part of business income.

Schedule IF: Information about partnership firms

Required for taxpayers who are partners in one or more firms: details of the firm’s name, PAN, profit-sharing ratio, and the taxpayer’s share of income.

Schedule AL: Assets and liabilities

Mandatory where total income exceeds Rs 50 lakh. Requires disclosure of the taxpayer’s personal assets (immovable property, equity portfolio, gold, vehicles, bank balances) and liabilities as at the end of the financial year.

Key changes for AY 2025-26

The Finance Act 2024 affects ITR-3 filers in several ways:

1. STCG and LTCG rate changes, the same Section 111A (20%) and Section 112A (12.5%) rate changes applicable to ITR-2 filers apply to the capital gains portion of ITR-3.
2. F&O STT increase, the increase in STT on equity futures (to 0.02%) and equity options (to 0.1% of premium) from 1 October 2024 affects the deductible STT amount for traders who claim it under Section 36(1)(xv). These rates rose again, to 0.05% on futures and 0.15% of premium on options, with effect from 1 April 2026 (Finance Act 2026), so returns covering FY2026-27 onward use the higher rates.
3. New tax regime, F&O traders can also elect the new regime under Section 115BAC, though the inability to carry forward certain business losses under the new regime makes this less attractive for loss-making traders.

Due dates for AY 2025-26

Taxpayers who require a tax audit but fail to obtain one by the due date are liable to a penalty of 0.5% of turnover or Rs 1,50,000, whichever is lower, under Section 271B.

Mandatory e-filing

ITR-3 must be filed electronically by all taxpayers (the paper filing exemption for super-senior citizens does not apply to ITR-3, as individuals with business income are always required to file electronically). The same offline and online utilities available for ITR-2 are available for ITR-3, but the form is considerably larger and the offline utility is generally more practical for complex returns.

After the CA uploads the tax audit report (Form 3CB/3CD), the taxpayer files the ITR-3 and links the audit report using the acknowledgement number generated by the CA’s upload.

ITR-3 versus ITR-2: the key distinction

The decision between ITR-2 and ITR-3 turns solely on whether any income is treated as business income:

Filing ITR-2 when ITR-3 is applicable results in a defective return and may attract a notice under Section 139(9) requiring the taxpayer to rectify the form.

See also

• ITR-2 (Income Tax Return)
• F&O taxation in India
• Securities Transaction Tax (STT)
• Capital gains tax in India
• Section 44AB, tax audit
• Section 111A, short-term capital gains on equity
• Section 112A, long-term capital gains on equity
• Grandfathering rule for LTCG
• Tax treatment of listing-day gains

References

1. CBDT, ITR-3 Form and Instructions for AY 2025-26, Income Tax India.
2. Income Tax Act 1961, Section 43(5), speculative and non-speculative transactions.
3. Income Tax Act 1961, Sections 44AB and 44AD, tax audit and presumptive taxation.
4. ICAI Guidance Note on Tax Audit under Section 44AB (latest edition), Institute of Chartered Accountants of India.
5. Finance Act 2024, Clauses relating to STCG/LTCG rate revision and STT revision, Ministry of Finance.
6. Income Tax Act 1961, Section 36(1)(xv), deduction for STT paid on business transactions.
7. CBDT Notification, ITR forms for AY 2025-26, published in Official Gazette.