Carry forward of losses
Using a loss not absorbed in the current year against income of later years. For F&O losses in PMS: up to 8 assessment years, and only against business income.
In plain language
A loss in one year does not have to be wasted. If there is not enough income to absorb it this year, the tax law lets you carry it forward and use it later.
The workbook discusses this for the income that most often produces such losses in a PMS: derivatives. Because futures and options income in PMS is treated as business income, losses from F&O are business losses — and follow business-loss rules.
There are two steps. First, set-off: use the loss against other eligible income in the same financial year. Second, if anything is left, carry forward: the unabsorbed loss can be used in later years — for up to 8 assessment years, and only against business income.
How it works
Classification (Chapter 11, section 11.2.3). Income from futures and options in PMS is business income, taxed under "Profits and Gains from Business or Profession" (PGBP) — not capital gains. This applies to both resident individuals and NRIs.
Treatment of losses from derivatives in PMS.
| Stage | Rule |
|---|---|
| Set-off (same year) | Against any other business income or non-salaried income |
| Not allowed | Against salary income |
| Carry forward | Unabsorbed loss can be carried forward for up to 8 assessment years |
| Future use | Only against business income |
Tax report. The portfolio manager's taxation report shows F&O gains and losses as business income and gives details on carry-forward of losses for 8 years (section 11.4.2).
Audit requirements for F&O turnover (section 11.2.3).
| Turnover | Tax audit |
|---|---|
| Up to ₹2 crore | Mandatory under Section 44AB(e) if profits are less than 6% of turnover, the taxpayer has opted out of presumptive taxation in the past five years, and total income exceeds the basic exemption limit; not required if profits are 6% or more |
| ₹2 crore to ₹10 crore | Not required if over 95% of transactions are digital |
| Above ₹10 crore | Mandatory under Section 44AB(a), regardless of profit or loss |
The workbook advises consulting a certified tax consultant for more clarity on derivatives taxation.
A worked example
Illustrative investor and amounts; the set-off and carry-forward rules are the workbook's.
Anil, a salaried professional who also runs a small consultancy, has a PMS approach that uses derivatives.
Year 1
| Income | Amount |
|---|---|
| Salary | ₹30,00,000 |
| Consultancy (business income) | ₹2,00,000 |
| F&O through PMS | Loss of ₹6,00,000 |
- Set off against consultancy income: ₹2,00,000 absorbed.
- Set off against salary: not allowed.
- Unabsorbed loss carried forward: ₹4,00,000.
Year 2
| Income | Amount |
|---|---|
| F&O through PMS (business income) | Profit of ₹3,00,000 |
| Long-term capital gain on equity in PMS | ₹5,00,000 |
- Carried-forward loss used against the ₹3,00,000 F&O profit (business income): ₹1,00,000 still unabsorbed.
- It cannot be used against the ₹5,00,000 capital gain — carry-forward is only against business income.
The remaining ₹1,00,000 can keep being carried forward, within the 8 assessment year limit from the year of loss.
Why NISM asks about it
Carry forward of losses is in Chapter 11 (Taxation), section 11.2.3, "Taxation on Derivatives", and again in section 11.4.2 as part of the portfolio manager's taxation report. Chapter 5 (Derivatives) and section 5.7 explain how portfolio managers use derivatives in PMS. Expect questions on the 8-year limit, the restriction to business income, and the bar on setting derivative losses off against salary.
Common exam traps
- F&O income in PMS is business income, not capital gains — so capital-gains loss rules are not what apply here.
- Same-year set-off: other business or non-salaried income — never salary.
- Carry forward: up to 8 assessment years, only against business income.
- Set-off comes first; carry forward covers only what remains.
- Tax audit for turnover up to ₹2 crore depends on profit below 6% and opting out of presumptive taxation in the past five years.
- Above ₹10 crore turnover, audit is mandatory regardless of profit.
Where this is taught
- Series XXI-A · Chapter 11: Taxationintroduced here
- Series XIX-E · Chapter 14: Taxationintroduced here
Related terms
- Assessment year (Section 2(9))The 12-month period beginning 1 April, defined by Section 2(9), in which income earned in the preceding previous year is assessed and taxed — for FY 2021-22, the assessment year is 2022-23.
- F&O turnoverThe ICAI-prescribed turnover figure for futures and options trading — the sum of favourable and unfavourable differences plus option premium received — that decides whether a tax audit or presumptive scheme applies.
- Cash settlementSettling a derivative on expiry or exercise by exchanging the price difference, without delivering the underlying asset. SEBI mandates physical settlement for stock derivatives, not index derivatives.
- PGBPThe Income Tax Act head under which futures and options income earned through a PMS is taxed as business income, not as capital gains, regardless of whether the investor is resident or NRI.
- Set-off of lossesUsing a business loss against other eligible income in the same financial year, before any unabsorbed balance is carried forward: for PMS F&O losses, against business or non-salaried income only, never salary.
- Carry forward of business lossTaking an unabsorbed business loss — including a loss on exchange traded derivatives — into later years: up to 8 assessment years, against business income only, and only if the return was filed by the due date.
- Taxation reportThe periodic statement a portfolio manager must give every PMS client under Regulation 30, covering capital gains, derivatives income, dividends, interest and fees so the client can work out tax due.