Carry Forward Loss - Need Help - Income Tax

Hello experts

I have some query and need your help with your suggestions. Thank you in advance.

Background:

I am a salaried employee and I had traded in F&O in AY21-22 (only 2 Large transactions during lockdown) and incurred a huge combined loss of approx. Rs.21 lakhs total. This was reported as Business Loss (non-speculative) in the IT Return and carried forward to the next year. I received the Assessment Order wherein Income Tax Department also allowed it as reported. Further, I filed returns for AY22-23 and AY23-24 reporting it as carry forward Business Loss (non-speculative) and also received Assessment Orders for all returns filed so far.

Now, I have Mutual Funds portfolio of Rs.80 lakhs value, which I intend to redeem in the current financial year and there is approx. Rs.25 lakhs unrealized gain. This gain will materialize on redemption of the Mutual Funds.

I recently met a friend of mine who is a CA and he suggested two options:

Option A: I can use carry forward loss as originally reported under Business Loss (non-speculative) and use it to set off STCG or LTCG on redemption of Mutual Funds. This is my friend’s suggested option.

Option B: Alternatively, he suggested, F&O loss can be claimed as Short-Term Capital Loss since there were only 2 one-off transactions and I am not in the business of F&O. Accordingly, I should File Revised Return for AY21-22 claiming F&O loss as ST Capital Loss instead of Business Loss (non-speculative) as reported earlier. I should also file Revised Returns for AY22-23 and AY23-24 changing the carry forward treatment to ST Capital Loss. This carried forward ST Capital Loss can then be used to set off against ST Capital Gain or LT Capital Gain on Mutual Funds which will materialize when I redeem Mutual Funds in the current financial year.

Please let me know:

In case of Option A, can F&O loss originally carried forward as Business Loss (non-speculative) be used to set off against STCG or LTCG on Mutual Funds.
In case of Option B, can F&O loss be considered as ST Capital Loss instead of Business Loss (non-speculative) as reported by me (and also assessed and approved by IT).
If answer to Question 2 above is Yes, then can I file Revised Return for AY21-22 and subsequently for AY22-23 and AY23-24?

I would be extremely grateful, if you can help me with your suggestions and guidance on the above.

Thank you very much.

Warm wishes,

Rohit

Hi Rohit,

You’ve raised a very relevant and practical query regarding the treatment of F&O losses and their set-off against mutual fund gains. Let me clarify the key points on your options:

Background Recap:

F&O trading losses of ₹21 lakhs reported as Business Loss (non-speculative) in AY21-22.
Loss carried forward and allowed by Income Tax department.
Mutual fund gains of ₹25 lakhs expected on redemption.

Your queries:

1. Option A: Can Business Loss (non-speculative) be set off against Capital Gains (STCG or LTCG)?

No, business loss (non-speculative) cannot be set off against capital gains.
Business loss can only be set off against business income or other heads as permitted, but not against capital gains.
Hence, loss reported as business loss cannot be used to reduce tax on mutual fund capital gains.

2. Option B: Can F&O loss be claimed as Short-Term Capital Loss instead of Business Loss?

The tax treatment of F&O losses depends on whether your activity qualifies as business or capital gains.
Frequent and substantial F&O transactions with profit motive generally treated as business income/loss.
However, if only a couple of transactions and no organized business setup, the tax authorities may accept it as Capital Loss.
Since your original return and assessment order accepted it as business loss, reclassifying it as capital loss might be difficult.
IT Act does not specifically allow conversion of loss heads post-assessment without valid reasons.

3. Can you file Revised Returns for AY21-22, AY22-23, AY23-24 to change the loss treatment?

Revised Return can be filed only within the prescribed time limit — generally 12 months from the end of relevant AY.
Since AY21-22 and AY22-23 are already assessed and beyond the time limit for revisions, revising to change loss head is not permitted.
For AY23-24, you might still be within time, but changing loss treatment without cause can lead to scrutiny or disallowance.

Summary Table

Point	Explanation
Set off business loss vs capital gains	Not allowed
Reclassify F&O loss as capital loss	Possible only before assessment within time limits
Filing revised returns to change loss classification	Limited by time; likely not possible for earlier years

Recommendations:

Since your loss is already accepted as business loss, use it to set off only business income in future years.
Capital gains from mutual funds will be taxable as usual; business loss cannot reduce that.
For future years, if F&O transactions are minimal, consider reporting under capital gains after consulting a tax expert.
For the current situation, Option A is the correct and safer approach.