A derivative is a contract that derives its value from the performance of an underlying financial asset. The most used underlying instruments include bonds, stocks, currencies, commodities, interest rates, and market indexes. Futures and Options are the most popular forms of derivatives. Incomes and losses arising from the trading of futures and options have to be treated as business income or loss. As there is no transfer of the underlying asset involved in the trading of derivatives, the income or loss from it cannot be taxed under the head “Capital Gains”. Moreover, as per Section 43(5)(d) of the Income Tax Act, any transaction that takes place during Futures and Options trading is deemed to be non-speculative transactions. Therefore, any profits earned from the trading of derivatives will be taxed in the same manner as profits earned from carrying on any other kind of business. This means that the taxpayer can claim deductions on tax for any expenses he may have incurred while trading in Futures and Options such as telephone bills, electricity bills, internet bills, etc. As a result, any loss arising from trading of F&O can be offset against income from house property, any other business income, or any other source of income except salary. Also, the unabsorbed losses can be carried forward for 8 Assessment Years and can be set off against any other business income under the heading “Profits and Gains from Business or Profession”. Tax audit, as per Section 44AB of the Income Tax Act, will be mandatory if the turnover or income arising from F&O trading in a financial year exceeds Rs. 1 crore.