Markets don’t always move in our favor, and it’s common for traders and investors to end a year with losses. The income tax department also recognizes this. And, it doesn’t just take a cut from your profits, but also offer relief when you incur losses.
So if you’ve booked losses from the stock market in the past financial year, you can actually use them to reduce your tax liability through set-off and carry forward of losses.
What is setting-off of losses?
Let’s say you made a profit from one source and a loss from another in the same financial year. Instead of paying tax on the full profit and ignoring the loss, you can adjust one against the other. This is called a set-off. This can happen within the same head of income or across different heads.
a) Intra-head set-off
This is when profits and losses are adjusted within the same head of income.
For example, if you earned ₹75,000 profit in F&O trades but lost ₹20,000 from intraday trades, you’ll pay tax only on your taxable income ₹55,000.
b) Inter-head set-off
When losses cannot be fully adjusted within the same head, they can be set off against another head of income.
For instance, if you lost ₹1,20,000 from F&O trading, but earned ₹1,50,000 in rent. This loss can be adjusted against the rent, and you’ll pay tax only on ₹30,000.
However, losses cannot be set off against salary income, lottery winnings, crypto income, or betting income.
What is carry-forward of losses?
If your losses are greater than your profits, and cannot be fully adjusted in the same year. In this case, you can carry forward the remaining losses and adjust them against eligible income in future years.
Say, in FY 2024-25, if you incurred a loss of ₹2,00,000 from F&O trading but had only ₹50,000 income from consulting, you can set off ₹50,000 in the current year, and the remaining ₹1,50,000 can be carried forward and adjusted against eligible business income in future years.
You can carry-forward losses only if your ITR is filed before the due date.
Rules for set off and carry forward of losses
The rules for losses differ by type, both in how they can be set off and how long they can be carried forward:
| Loss type | Current year loss adjustment | Brought-forward loss adjustment | Carry-forward duration |
|---|---|---|---|
| Speculative business loss (intraday) | Intraday profits | Intraday profits | 4 years |
| Non-speculative business loss (F&O) | Any income except salary | Any business income | 8 years |
| Long-term capital loss | Long-term capital gains | Long-term capital gains | 8 years |
| Short-term capital loss | Both short-term and long-term gains | Both short-term and long-term gains | 8 years |
- Speculative losses (intraday) can be carried forward for 4 years and set off only against speculative gains.
- Non-speculative losses (F&O) can be carried forward for 8 years and set off against any other income (except salary) in the same year.
- Long-term capital loss can only be adjusted against long-term capital gains, whether in the same year or future years.
- Short-term capital loss can be adjusted against both short-term and long-term gains.
You see, losses are a part of every investor’s journey. But with a little planning (and timely ITR filing), you can use them to save some taxes, today or a few years down the line.