Set Off And Carry Forward Of Losses On Shares

Hi friends, I am back with another blog. First of all wish you everyone A Merry Christmas. In continuation with my last blog, wherein we learnt about “Disallowances of Expenses on Exempt Income”, in this blog we shall discuss regarding “Set Off & Carry Forward of Losses on Shares”. An individual can have income from more than one head. The Income Tax Act prescribes rules to set-off loss and carry forwards off losses on shares.

Losses In Speculation Business:

A speculation transaction is a transaction in which a contract for purchase or sale of any commodity, including stocks and shares is ultimately settled otherwise than by actual delivery or transfer of the commodity.

Losses of speculation business can be set-off only against profits of speculation business. Such losses can be carried forward for 4 Assessment Years and can set-off against speculation income only. Loss from a non speculation business can be set off against income from speculation or non speculation business. In case, loss is to carried forward and adjusted against future income, the taxpayer must ensure that the tax return is filed by due date. In case tax return is not filed by due date, the loss cannot be carried forward.

However, in terms of the specific provisions contained in the Income Tax Act, 1961, a transaction in respect of trading in derivatives carried out, normally referred as Futures & Options (F & O), on a recognized stock exchange shall not be treated as speculative transaction even if no deliveries are effected. The loss on these F & O transactions is considered as business loss. The said business loss can be set off against any head of income (Income from business/profession, Capital gain, Income from House Property, Income from other sources) other than Salary during the same year and loss not set off can be carried forward for next 8 years but such carried forward loss can be set off against business income only and as mentioned earlier, the tax payer needs to file the tax return in time to carry forward the losses.

In addition to the above, Finance Act, 2013 has made amendment in sec 43 (5) due to which Profit / Loss from Commodity trading on a recognised stock exchange is also now treated as non-speculative.

Shares Held As Capital Assets:

Losses under the head capital gains cannot be set off against income under any head of income. Where income from a particular source is exempt from tax, loss from such source cannot be set off against income chargeable to tax. Therefore, long term capital loss from shares where STT is paid cannot be adjusted against any long or short-term capital gain from any source. It cannot be carried forward to the next year too.

In case of capital assets on which STT is not paid, the long term capital loss can be set off against long term capital gain (LTCG) only. It can be carried forward to next 8 Assessment Years and set off against Long Term Capital Gains (STCG). Short term capital loss can be set off against the same source or long term capital gain. It can be carried forward to next 8 assessment years and set off against LTCG or STCG.

Shares Held As Stock In Trade:

The loss is assessable as business loss. The same can be set off against any source or any head except income from salary. It can be carried forward to next 8 Assessment Years and set off against any business income. Loss of a business in year one can be set off against profit of some other business in year two.

The loss on sale of Derivatives/ Futures & Options that is without delivery is assessable as business loss. Loss on sale of currency futures at MCX Stock Exchange Ltd and in NSE/BSE is also assessable as business loss.

Return Of Loss:

A loss cannot be carried forward unless it is determined in pursuance of a return filed within the due date. Therefore if return of loss is not filed within the due date, then short or long term capital loss & loss of a speculative or non speculative business cannot be carried forward.

Elvis D'Souza

Elvis D'Souza

Elvis is responsible for managing the entire backoffice operation at RKSV. Elvis enjoys movies, partying, and listening to music. He is a self proclaimed biggest Aamir Khan fan on the planet.

  • SHANKAR

    Wonderful blog, I really neeeded to read this, specially when I am struggling to find a CA or an Auditor who understands the inside out of stock market and audits my income. If you don’t mind can you tell me the technical name used to identify auditors who specialize in this field.

    • Elvis D’Souza

      Thank you Mr. Shankar, glad you liked it. With regards to identifying the auditors, I guess any CA / Income Tax Consultant should be able to help you.

  • Rohit

    what is tax for F&o gains…
    I mean if i get profit 10000 in intraday and 50000 remaining year for total 60000 how much i need to pay tax…

    • Elvis D’Souza

      Intraday is a speculative business and the remaining FnO derivative transactions are non speculative business. If you have total income of Rs. 60000, this is below the minimum amount chargeable to tax, therefore no tax is to be paid. However, if this amount goes above Rs. 200000, then intraday and remaining FnO derivative transactions would be considered as seperate business and would be taxable at the normal rates as per your slab.

      • DINO

        IS INTRADAY OF ANY TYPE OF TRADING LIKE STOCKS, SHARES, F& O, COMMODITY, CURRENCY ARE SPECULATIVE OR ONLY STOCKS. CLARIFY

        • Elvis D’Souza

          Intraday is always considered as speculative business irrespective of whether trading is done in shares, F&O, Commodity or Currency.

  • Manas Kumar Maity

    Dear Sir,
    You have stated in your Blog above that loss on sale of Currency Futures at MCX Stock Exchange Ltd and in NSE/Bse is also assessable as business loss but in my opinion this loss is speculative u/s 43(5) of IT Act since no specific amendment of said section has been made as amendments were made in case of Security Derivatives in 2006 and Commodity Derivatives in 2013. Currency Derivative is neither Security Derivative nor Commodity Derivative because security Derivative is under securities Contracts (Regulation) Act,1956 and carried out in a recognised Stock Exchange and Commodity Derivative is under Forward Contracts (Regulation) Act and carried out in a recognised association(MCX). It is true Currency derivative is controlled by SEBI as well as RBI jointly and carried out in a recognised Stock Exchange but in my view Currency Derivative will not come out of 43(5) until there is a specific amendment of section 43(5) what has been done in case of Security Derivative and Commodity Derivative. I would request you to look into this matter. Thanking You. With regards . M K Maity.

  • Elvis D’Souza

    Sir the CBDT had notified MCX Stock Exchange Ltd. by S.O. 1327(E) dated 22nd May 2009 as a recognized stock exchange. I am quoting the notification for your reference.

    In exercise of the powers conferred by clause (ii) in the Explanation to clause (d) of the proviso to sub-section (5) of section 43 of the Income-tax Act, 1961 (43 of 1961), read with rule 6DDB of the Income-tax Rules, 1962, the Central Government hereby notifies MCX Stock Exchange Ltd. as a recognized stock exchange for the purpose of the said clause with effect from the date of publication of this notification in the Official Gazette.
    2. MCX Stock Exchange Ltd. shall separately maintain data regarding all transactions registered in the system in which client codes have been allowed to be changed for periodical inspection by the Director-General of Income-tax (Investigation) having jurisdiction over such exchange and provide copies of the relevant information as and when required.
    3. The Central Government may withdraw the recognition granted to MCX Stock Exchange Ltd. if any of the conditions specified in rule 6DDA of the Income-tax Rules, 1962, subject to which the recognition is granted, is violated.
    4. This notification shall remain in force until the approval granted by the Securities and Exchange Board of India is withdrawn or expires, or this notification is rescinded by the Central Government as provided in sub-rule (5) of rule 6DDB of the Income-tax Rules, 1962. – Notification No. SO 1327(E), dated 22-5-2009.

    Now, it is clear that since currency derivatives are normally cash settled and are not capable of physical settlement, and the life of currency derivatives does not exceed 12 months, generally transactions in currency derivatives would be regarded as business transactions. This would be the position particularly where currency derivatives transactions are entered into as part of normal business transactions, such as to hedge business transactions. Today, most transactions in currency derivatives are entered into by businesses for hedging purposes and, therefore, in such cases there is no doubt that the currency derivatives transactions would be treated as part of normal business transactions.

    Do let us know in case of any further doubt.

    Thanks.