Carry Forward of Share Trading Losses AY 2025-26: New ITR Business Codes, Income Tax Rules, Section 44AB Audit, F&O & Intraday Compliance with Examples

Introduction

This article provides a comprehensive professional guide on the carry forward and set-off of share trading losses for Assessment Year (AY) 2025-26. It explains the statutory provisions, ITR compliance rules, and practical examples for various forms of trading, including intraday equity, futures & options (F&O), and delivery-based transactions.

Carrying forward a trading loss is not merely a procedural exercise - it is a statutory right governed by specific provisions of the Income-tax Act, 1961. If these conditions are not complied with in the relevant assessment year, the right to set off such losses in future years is permanently forfeited.

The importance is self-evident - a properly carried-forward loss from the current year can offset future profits and result in substantial tax savings in subsequent years.

1. Why This Topic is Crucial in AY 2025-26

In July 2025, the CBDT introduced new business codes for traders:

• 21009 - Intraday Equity (Speculative)
• 21010 - F&O Trading (Non-Speculative)
• 21011 - Delivery-Based Business Trades

Simultaneously, updates to the ITR schema have created practical filing challenges, particularly for code 21011, where the ITR-4 utility is not yet fully compatible.

Loss carry-forward is not automatic. It is subject to statutory compliance, and failure to meet even one requirement can result in permanent denial of set-off rights.

2. Legal Framework & Key References

• Sections 28-74 - Classification of income, set-off, and carry-forward rules
• Section 43(5) - Definition of speculative transactions (with exclusions for certain derivative trades)
• Sections 139(1), 139(3), 80 - Timelines and conditions for filing loss returns
• Section 44AB - Tax audit applicability
• Section 44AD - Presumptive taxation and restrictions
• CBDT Circular No. 6/2016 - Classification of securities as capital assets or stock-in-trade
• ICAI Guidance Note - Methodology for turnover computation in share trading

3. Correct Classification - The Foundation

4. Four Statutory Conditions for Carry Forward of Loss

Condition 1 - Correct Classification

Loss must be correctly categorised as speculative, non-speculative, or capital; each follows distinct set-off rules.

Condition 2 - Timely Filing

Under Sections 139(3) and 80, the return must be filed on or before the due date under Section 139(1):

• 31 July 2025 - Non-audit cases
• 31 October 2025 - Audit cases

(Late filing forfeits the right to carry forward losses - International Fresh Farms v. ITO, ITAT Chandigarh, 2023).

Condition 3 - Audit Requirement

Audit under Section 44AB is applicable if:

1. Turnover exceeds ₹1 crore (₹10 crore if at least 95% of receipts and payments are digital), or
2. The assessee opted for Section 44AD earlier and now reports profit below 6%/8% or a loss.

Loss alone does not trigger an audit.

Condition 4 - Proper Documentation

• Separate ledgers for each category
• Turnover computation as per ICAI method
• Broker statements and contract notes retained for six years

5. New Business Codes - Compliance Reality

Workaround for 21011:

• Use 21008 - Other Services n.e.c. in ITR-4 with an explanatory note, or
• File ITR-3 and revise u/s 139(5) after CBDT releases the utility patch.

6. Turnover Computation - ICAI Methodology

• Intraday equity - Total of absolute profit/loss differences
• F&O - Absolute differences plus option premiums
• Delivery-based business - Total sale value of shares sold during the year

7. Loss Set-off & Carry-forward Provisions

8. Practical Illustrations

• Example 1 - Intraday Loss with Audit: Mr. A incurs ₹80,000 intraday loss, turnover ₹1.6 crore (98% digital).Audit under Sec. 44AB(a) required. Loss can be carried forward for four years if filed by 31 October 2025.
• Example 2 - F&O Loss Without Audit: Ms. B has ₹3 lakh F&O loss, turnover ₹28 lakh.No audit required. File ITR-3 by 31 July 2025 for eight-year carry-forward.
• Example 3 - 44AD Exit Trap: A firm under Sec. 44AD in AY 2024-25 reports ₹4 lakh loss in AY 2025-26 with ₹45 lakh turnover.Audit mandatory under Sec. 44AB(e). Timely filing secures eight-year carry-forward.
• Example 4 - Capital Loss Filed Late: An investor with ₹5 lakh LTCL files return after due date. Loss cannot be carried forward.

9. Professional Checklist for AY 2025-26

• Identify trade type and classify correctly
• Compute turnover as per ICAI guidelines
• Verify audit applicability under Sec. 44AB
• Use correct business code (or apply workaround)
• File return within Sec. 139(1) due date
• Maintain documentation for six years

Conclusion

For AY 2025-26, the carry forward of share trading losses demands both statutory precision and practical adaptability to technology glitches in the filing system. New business codes have streamlined reporting, but technical limitations (particularly for code 21011) require careful handling to safeguard the taxpayer's rights.

As professionals, our objective is to ensure that clients not only comply with the statutory provisions but also retain the full benefit of their losses as a future tax shield.

The author can also be reached at varunmukeshgupta96@gmail.com.