Carry forward of business loss

A loss in one year need not be wasted. The Income-tax Act lets you use it against income, first in the same year and then in later years.

For exchange traded currency derivatives, the classification comes first. Gains and losses are taxable under Profits and Gains from Business or Profession, and because a recognised-exchange derivative trade is not a speculative transaction, the loss is a normal business loss.

That gives it two steps.

Step one, the same year. A normal business loss can be set off against income from the other heads. But there is one bar: it cannot be set off against income from salary.

Step two, later years. Whatever is left over — the unabsorbed loss — can be carried forward for up to 8 assessment years. In those later years it can be set off only against business income, not against anything else.

And there is a condition that catches people out. The right to carry forward depends on filing on time. The assessee is entitled to carry the loss forward provided the return of income is filed on or before the due date. If the return is not filed within the prescribed due date, the right to carry forward and set off is lost.

Not reduced. Lost.

The classification that makes it a business loss (Chapter 9, section 9.2). Gains or losses from trading in exchange traded derivatives are taxable under Profits and Gains from Business or Profession (PGBP), and any expenditure relating to administration is deductible. The Act splits business income into speculative and non-speculative, and treats speculative income differently and more rigorously: any loss arising from a speculative transaction can be set off only against speculative income.

A transaction is deemed speculative if it is periodically or ultimately settled otherwise than through actual delivery or transfer. Cash-settled currency derivatives would fall into that trap but for an express carve-out: Section 43(5) excludes certain derivative transactions, and an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956, carried out in a recognised stock exchange, shall not be deemed to be a speculative transaction. So income or loss from exchange traded currency derivatives is deemed to be normal, non-speculative business income even though delivery is not effected, and any loss from exchange traded derivatives can be set off against any normal business income.

The two stages (section 9.2.3):

The contrast with a speculative loss. The workbook does not say how long a speculative loss may be carried forward — it says only that it may be set off only from speculative income. Do not supply a figure for it. The 8 assessment years in this chapter belongs to the non-speculative business loss.

Who does not get this treatment. Securities held by FPIs are always treated as a capital asset, so profits and gains arising to an FPI from derivative transactions are always taxable under capital gains — generally short-term capital gain or loss if the positions are held for less than 12 months. An FPI therefore never reaches the business-loss carry forward rules at all.

Turnover, for the audit test. The Act gives no method, so the ICAI Guidance Note on Tax Audit prescribes one: the total of favourable and unfavourable differences is taken as turnover; premium received on sale of options is also included; and in respect of reverse trades, the difference is also part of turnover. On the audit threshold the workbook carries two figures, and both should be stated: a tax audit is mandatory if turnover or income from exchange traded derivatives is above Rs 2 crore, and the Union Budget for FY 2024-25 increased the turnover limit to Rs 3 crore, subject to 95% of receipts being through online modes. Under the presumptive scheme of Section 44AD — available subject to total turnover not exceeding Rs 2 crores, again with the Budget increase to Rs 3 crore on the same condition — profits may be declared at 6% of turnover where receipts are by cheque or digital modes, or 8% for cash receipts, and the presumptive income is final, with no books under Section 44AA and 100% of advance tax payable in a single instalment up to 15 March.

A trader's two years. Mr Mehta trades USDINR futures on a recognised exchange and also runs a small trading business. For the year he has:

Year 1 — set-off.

His Rs 6,00,000 salary is taxed in full. The Rs 10,00,000 unabsorbed loss is what he can carry forward.

And the filing condition decides whether he can.

Years 2 onward — use. Suppose he files on time and the next three years bring:

Year 3 is the row that catches candidates. In the first year the loss reached house property income. In later years it cannot.

Why the loss was not speculative. Mr Mehta never took delivery of a single dollar — every contract was cash settled in rupees.

Had he instead traded in an unrecognised or off-exchange manner, the loss would have been speculative and could have been set off only against speculative income.

An FPI in the same position. An FPI with a Rs 18,00,000 derivative loss does not touch any of the above. Securities held by FPIs are always a capital asset, so its loss is a capital loss — generally short-term on positions held under 12 months.

Chapter 9, section 9.2.3 (Set-off and Carry Forward of Losses), is the source for the 8 assessment years, the business-income-only restriction and the return-filing condition; section 9.2 gives the PGBP classification, the speculative / non-speculative split, the Section 43(5) carve-out and the FPI capital gains treatment; sections 9.2.1 and 9.2.2 give the ICAI turnover method, the audit thresholds and the Section 44AD scheme. The chapter's own sample questions test this directly: which head derivative income falls under, what a recognised-exchange derivative loss cannot be set off against (salary), and for how many assessment years it may be carried forward (8).

• 8 assessment years. The sample question offers 5, 6, 7 and 8, and the answer is 8.
• Same year: any head except salary. Later years: business income only. The restriction tightens after the first year, and a question will test the difference.
• File by the due date or lose the carry forward entirely. This is a complete forfeiture, not a deferral.
• A cash-settled exchange traded derivative is NOT speculative. Section 43(5) and clause (ac) of section 2 of the SC(R)A take it out, even though no delivery occurs.
• A speculative loss is a different animal — set off only against speculative income. The workbook gives no carry-forward period for it, so do not import one.
• FPIs are outside this regime. Their securities are always a capital asset and their derivative gains are capital gains, generally short-term under 12 months.
• The audit threshold has two numbers in the workbook: Rs 2 crore, and Rs 3 crore from the Union Budget for FY 2024-25 where 95% of receipts are online. State both; the exam is set from the workbook, and the Rs 2 crore figure is still printed in it.
• Section 44AD presumptive rates are 6% for digital or cheque receipts and 8% for cash. Do not apply the 8% to an exchange-traded trader whose receipts come through banking channels.