Stock Market or F&O Income Not Reported in Your ITR? The AIS Mismatch Notice, and How to Reply

Every equity sale, every mutual-fund redemption, every futures and options contract, and every dividend you received last year was reported to the income-tax department by your broker, your depository, or the fund’s registrar — at the transaction level, against your PAN. It sits in your Annual Information Statement under headings like Sale of securities and units of mutual fund and Dividend. The department’s rule then asks a single question: does the return show it?

A return on ITR-1 or ITR-2 with no capital-gains schedule, against an AIS full of trades, does not pass. A return that reports shares but omits F&O does not pass. A return that reports F&O on ITR-2 instead of ITR-3 is defective. None of this requires an officer to form a view; the flag is automatic, and it now reaches salaried employees who dabbled in options as readily as full-time traders.

This guide covers what the AIS actually shows, how each kind of market income is taxed for FY 2025-26, the reasons a correct return can still mismatch, why an unreported F&O loss is the most expensive omission of all, and how to reply.

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What the department has on you

AIS heading	Who reports it	What it shows
Sale of securities and units of mutual fund	Depositories and fund registrars	Every sale or redemption — gross consideration, not gain
Purchase of securities and units of mutual fund	Depositories and registrars	Every purchase, including SIPs
Dividend	Companies and funds; TDS under 194 above ₹10,000	Every dividend credited
Off-market credit / debit	Depositories	Gifts, transfers between demat accounts, ESOP allotments
Business receipts (derivatives)	Exchanges via brokers	F&O and intraday activity, in some cases as contract-level data

The most important word in that table is gross. The AIS shows the sale value, not the profit. An investor who churned ₹10 lakh of capital twelve times in a year has an AIS showing ₹1.2 crore of securities sold. The department knows that is not income. But it does not know what the income was unless your return tells it — and if the return is silent, the flag is raised against the gross figure, and the 148A show-cause that follows may cite “escaped income” in crores.

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How each kind of market income is taxed for FY 2025-26

Four activities, four tax treatments, and the form you file depends on which of them you did.

Activity	Head of income	Rate (transfers on or after 23 July 2024)	Form
Delivery-based shares and equity mutual funds held more than 12 months	Long-term capital gains under 112A	12.5% on gains above ₹1.25 lakh a year; cost grandfathered to 31 January 2018 value	ITR-2
Delivery-based shares and equity funds held 12 months or less	Short-term capital gains under 111A	20%	ITR-2
Intraday equity (bought and sold the same day)	Speculative business income under Section 43(5)	Slab rate	ITR-3
Futures and options — equity, index, currency, commodity	Non-speculative business income (proviso to 43(5))	Slab rate	ITR-3
Debt funds bought on or after 1 April 2023, and other non-equity assets	Capital gains at slab, or 12.5% long-term for other assets	Varies	ITR-2
Dividends	Income from other sources	Slab rate	Any

Two consequences follow. First, if you traded F&O or intraday at all, ITR-1 and ITR-2 are the wrong forms. Business income requires ITR-3, and a return on the wrong form is a defective return under 139(9) — the department gives you 15 days to fix it, after which the return is treated as never filed. Second, the 87A rebate does not apply to 111A and 112A gains from AY 2026-27: an investor whose total income is under ₹12 lakh still pays 20% on short-term equity gains.

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The reasons a correct return can still mismatch

Most market notices are not concealment. They are one of these, and the automated match sees none of them.

#	What happened	Why the AIS disagrees
1	Gross vs net	You declared the gain; the AIS shows the sale value. A ₹1.2 crore AIS figure against a ₹40,000 gain looks like a 99% omission until you show the broker’s P&L.
2	Wrong form	F&O or intraday reported on ITR-2 as capital gains — or left off because “it was a loss.”
3	F&O loss not reported at all	Traders assume a loss means nothing to declare. The AIS shows the contracts; the return shows nothing; the flag is raised — and the carry-forward is lost.
4	Grandfathered cost ignored	Shares bought before 31 January 2018 are costed at that date’s fair market value for 112A. Declare the original cost and the gain is overstated; ignore the schedule and the sale is unreported.
5	Mutual-fund switches and SIP redemptions	A switch between schemes is a redemption and a purchase. Each SIP unit has its own holding period. Both are reported; both are routinely missed.
6	Bonus, split, and rights	Cost basis of bonus shares is nil; splits change the per-share cost. Misallocation produces a gain figure the AIS cannot reconcile.
7	Dividends reinvested or below the TDS threshold	Reinvested dividends never hit your bank, but they are income. Dividends under ₹10,000 carry no TDS but are still reported.
8	ESOPs and off-market credits	Shares allotted under an ESOP appear as an off-market credit; the later sale is a capital gain with a cost equal to the perquisite value already taxed.
9	Minor’s or spouse’s demat	Income in a minor child’s account is clubbed with the parent’s; the AIS lands in the child’s PAN, the return should carry it in yours.
10	Cost or date errors in the broker’s tax P&L	The broker’s statement is your best document, but corporate actions and transferred-in holdings often carry wrong cost or acquisition dates.

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Why an unreported F&O loss is the most expensive omission

This is the point most traders get exactly backwards. F&O is business income. A business loss can be set off in the same year against income under any head except salary — including capital gains and other sources — and whatever remains carries forward for eight years against future business income. Speculative losses from intraday carry forward for four years against speculative gains only.

Both benefits have one condition: the loss must be declared in a return filed by the due date. File late, or leave the loss off, and it is gone.

Worked example

Facts: Salaried employee, FY 2025-26. Salary ₹15 lakh. Short-term gains on delivery shares ₹1.5 lakh. Dividends ₹18,000. Net F&O loss ₹3 lakh. Filed ITR-1 showing salary only.

As filed: the AIS shows securities sold, F&O contracts, and dividends against a return that reports none of them. Flagged on three counts. And because the F&O loss was never declared, it cannot be carried forward — the eight-year benefit is forfeited on the day the return goes in.

As it should have been filed, on ITR-3:

Item	Amount
Salary	₹15,00,000
Short-term capital gains (111A)	₹1,50,000
Dividends	₹18,000
F&O loss set off against STCG and dividends (Section 71)	(₹1,68,000)
Net STCG and other-sources income after set-off	Nil
F&O loss carried forward to future years	₹1,32,000
Tax on the 111A gain	Nil, instead of ₹30,000

Reporting the loss correctly does not add tax. It removes ₹30,000 of tax on the equity gain, wipes the dividend income, and banks a ₹1.32 lakh loss against future trading profits. The unreported return, by contrast, invites a notice on three heads, exposes the ₹30,000 anyway once the gains are added back, and throws the loss away.

Rates and thresholds as applicable to transfers on or after 23 July 2024 and to AY 2026-27: STCG under 111A at 20%; LTCG under 112A at 12.5% above ₹1.25 lakh; 87A rebate not available against 111A or 112A income; dividend TDS threshold ₹10,000. Cess of 4% applies on top. Figures are indicative.

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The audit question, briefly

Because F&O is business income, traders ask whether a tax audit is triggered by a loss. Two rules apply. Audit under 44AB is mandatory if turnover exceeds ₹10 crore (where cash receipts and payments are each 5% or less), otherwise ₹1 crore. And a trader who opted for 44AD in an earlier year and now declares a lower profit falls under 44AD(4), which forces books and audit if total income exceeds the basic exemption. A first-time F&O loss, with turnover under the threshold and no prior 44AD election, does not by itself require an audit — but it does require ITR-3, a profit-and-loss computation, and the turnover figure calculated the way ICAI prescribes. Our guide to ITR for F&O traders covers the turnover computation in detail.

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The notices you may receive

Notice	What it says	Your window	If you do nothing
139(9) defective return	Wrong form for the income in AIS — business income declared on ITR-1 or ITR-2, or a mismatch between schedules	15 days, extendable	Return treated as invalid; you become a non-filer for the year
143(1)(a) proposed adjustment	The processing centre proposes to add gains or dividends visible in AIS	30 days	Adjustment made; demand raised
Compliance-portal / e-Verification flag	”Confirm or explain” the securities transactions in AIS	As specified	Escalates to 148A
148A show-cause	Income “escaped assessment” — frequently citing the gross sale value	Never less than seven days	Reassessment on the department’s figure
143(2) scrutiny	Full examination; common where the AIS gross figure is large	About 15 days	Best-judgement assessment

The 148A citing a gross figure is the one to take most seriously. Reassessment can reach back three years, or five where the escaped income is ₹50 lakh or more — and on the department’s reading of a churned portfolio, it usually is.

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How to reply

1. Reconcile the AIS gross figure to your broker’s tax P&L, scrip by scrip. The reply’s spine is a schedule that takes each AIS sale entry, matches it to the contract note or the broker’s capital-gains statement, and shows purchase date, cost (grandfathered where applicable), sale value, and the resulting gain or loss. The total of the sale column must equal the AIS figure; the total of the gain column is your income. This single schedule answers “why does your return show ₹40,000 against a ₹1.2 crore sale.”

2. Separate the four activities. Delivery gains by holding period; intraday as speculative business; F&O as non-speculative business with turnover computed on the ICAI method; dividends. Each goes in its own schedule on ITR-3.

3. Fix the form. If the notice is a 139(9), file the corrected return on ITR-3 within the 15 days. If it is a 143(1)(a) or a compliance flag, and a revised return under 139(5) is still open, revise onto the right form with every schedule populated. If the year is closed for revision and not under reassessment, an updated return under 139(8A) is available — but note that an ITR-U cannot be used to declare or increase a loss, so the carry-forward is not recoverable that way.

4. Claim what the omission was costing you. Where the original return was filed on time, the F&O loss can be brought on record through the revised return and set off or carried forward. Where it was not, say so plainly, declare the loss anyway for a complete record, and accept that the carry-forward is lost — the reply is still stronger for showing the full picture than for hiding a loss.

5. Address penalty in the reply. Where receipts were fully reported by third parties and the omission was a form or classification error, the explanation is bona fide and all material facts are disclosed — Section 270A(6)(a). Section 270A(9)‘s six misreporting categories do not include a wrong form or an unclaimed loss. Say so, with the reconciliation attached, before the department characterises it otherwise.

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What not to do

• Do not treat a loss as nothing to report. It is the one omission that costs you both a notice and money.
• Do not reply “the gains were correctly declared” against a gross AIS figure. Show the reconciliation, or the gross figure stands.
• Do not file F&O on ITR-2 to avoid the “business” schedules. It is a defective return, and the department now checks.
• Do not use the broker’s P&L blindly. Verify cost and dates for bonus, split, ESOP, and transferred-in holdings before you attach it.
• Do not ignore dividends because they were small or reinvested. They are in the AIS, and the mismatch rule does not have a materiality threshold.
• Do not file ITR-U to declare a loss. It is not permitted, and the year may already be under reassessment.

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Frequently asked questions

The AIS shows securities sold worth ₹1.2 crore but my actual gain was ₹40,000. Is the department going to tax ₹1.2 crore?

Not if you reply. The AIS reports gross sale value, and the department knows it is not income — but until you file a scrip-by-scrip reconciliation to your broker’s P&L showing cost and gain, the only figure on record is the gross one, and a 148A show-cause may well cite it. The reconciliation closes the gap.

I only had an F&O loss last year. Do I still have to report it?

Yes, on ITR-3, and it is in your interest to do so. A non-speculative business loss sets off against capital gains and other income in the same year and carries forward for eight years — but only if it is declared in a return filed by the due date. An unreported loss is flagged as unreported activity and the carry-forward is forfeited.

I filed ITR-2 and put my F&O profit under capital gains. Is that a problem?

It is a defective return under 139(9): F&O is business income and requires ITR-3. Expect a notice giving 15 days to file the corrected form. If the profit was declared in full, the tax difference may be small — but the form must be corrected or the return is treated as never filed.

My salary is under ₹12 lakh. Do I still pay tax on short-term equity gains?

Yes. From AY 2026-27 the Section 87A rebate does not apply to gains taxed under 111A or 112A. A salaried person with total income under ₹12 lakh pays 20% on short-term equity gains and 12.5% on long-term equity gains above ₹1.25 lakh, regardless of the rebate on the rest of their income.

Can I file an updated return to add the F&O loss I forgot?

No. An updated return under 139(8A) cannot be used to declare a loss, increase a loss, or reduce tax. If the original return was filed on time and the revision window is still open, use a revised return under 139(5). Otherwise the loss cannot be carried forward, though it should still be declared for a complete record in any reply.

Does a loss in F&O mean I need a tax audit?

Not by itself. Audit is triggered by turnover above the 44AB threshold, or by 44AD(4) where you previously opted for presumptive taxation and now declare lower profit. A first-time F&O loss with turnover under the threshold requires ITR-3 and a proper profit-and-loss computation, not an audit.

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Related reading

• Income Tax Notice Reply & Representation — our service
• Stock Market & F&O Taxation — our service
• ITR for F&O Traders FY 2025-26: Tax Audit & Turnover Guide
• Set-off and Carry-Forward of F&O Trading Losses
• Capital Gains Tax FY 2025-26: Stocks, Mutual Funds & Property
• Income Tax Notice for Capital Gains on Property Sale