Set-off of losses
Using 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.
In plain language
A loss on one trade does not have to sit unused just because other income arrived in the same year. Set-off is the first, same-year step: using a loss to reduce other taxable income before working out what tax is due.
For a PMS client trading futures and options, F&O losses are business losses, taxed under PGBP, and the workbook gives a specific, narrow rule for what they can be set off against in that same year: "business losses from derivatives can be set off against any other business income or non-salaried income in the same financial year." One income type is expressly ruled out: "derivative losses cannot be set off against salary income."
How it works
The rule, in two parts (Chapter 11, section 11.2.3).
| Set-off allowed against | Set-off barred against |
|---|---|
| Any other business income in the same year | Salary income |
| Non-salaried income in the same year |
Set-off comes first; carry forward covers what is left over. If a loss is not completely absorbed by set-off in the current year, the remaining balance is carried forward, for up to 8 assessment years, and only usable against future business income.
The workbook's set-off rule is specific to F&O losses earned through a PMS. It does not restate the Income Tax Act's general set-off rules for capital losses or losses under other heads.
A worked example
Ms. Iyer, a salaried marketing manager who also earns rental income from a shop she owns, trades F&O through her PMS.
| Head | Amount |
|---|---|
| Salary | ₹18,00,000 |
| Rental income (non-salaried) | ₹3,00,000 |
| F&O loss through PMS (business loss under PGBP) | ₹4,50,000 |
She sets the ₹4,50,000 F&O loss off against her ₹3,00,000 rental income first, fully absorbing it: ₹1,50,000 of the loss remains unabsorbed. She cannot set any part of the loss off against her ₹18,00,000 salary. That route is barred outright, however large the loss.
The remaining ₹1,50,000 is carried forward to future years, to be set off only against business income earned in those years, within the 8-assessment-year window.
Why NISM asks about it
Chapter 11 (Taxation), section 11.2.3, states the set-off rule immediately before the carry-forward rule, as the first of two steps in treating a derivatives loss. Expect a question distinguishing what a derivative loss can be set off against, other business or non-salaried income, from what it cannot, salary, often paired with a carry-forward calculation.
Common exam traps
- Salary income is expressly excluded from set-off, even in the same year the loss arises. This is the single most tested point in this rule.
- Set-off happens first, in the same financial year; carry forward only covers what set-off could not absorb.
- This rule is specific to F&O business losses in a PMS. Do not generalise it to capital losses on equity or debt, which follow different set-off rules not covered in this workbook's derivatives section.
- "Non-salaried income" is the permitted category, alongside other business income. Do not read the rule as barring set-off against everything except business income.
Where this is taught
Free preparation for NISM Series XXI-ARelated terms
- Carry forward of lossesUsing 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.
- 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.
- Intra-head adjustmentSetting off a loss from one source against income from another source under the same head of income — the first step of loss relief, under section 108 of the Income Tax Act, 2025.
- Inter-head adjustmentSetting off a loss under one head of income against income under a different head — permitted by section 109 of the Income Tax Act, 2025, but only after intra-head set-off and subject to two bars.
- 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.
- Annual valueThe notional rental value on which income from house property is taxed — nil for self-occupied property, reasonable expected rent for deemed let-out, and the higher of that or actual rent if let out.