NISM-Series-VIII: Equity Derivatives · Accounting and Taxation

Set-off and Carry Forward of F&O Losses: Rules for NISM Equity Derivatives

Updated 11 October 2026 · Fact-checked

Equity derivative losses are treated as non-speculative business losses. You can set them off against income from any head except salary in the same year. Any unabsorbed balance is carried forward for eight assessment years, and in those years it sets off only against business income. The return must be filed by the due date.

Understand Set-off and Carry Forward of Losses

A loss in futures and options is a business loss for tax purposes. Equity derivatives traded on a recognised exchange are not treated as speculative transactions. So the loss is a non-speculative business loss. This is the starting point for every question on this topic.

Set-off happens in two stages. First, in the same year, you reduce the loss against other income. Under the Income-tax Act, a non-speculative business loss can be set off against income under any head except income from salary. So it can reduce house property income, other business income, capital gains and income from other sources.

If the loss is larger than your income that year, the balance is carried forward. You can carry it forward for eight assessment years immediately following the year in which the loss arose. In those later years, you can set it off only against income from business or profession. It does not set off against salary, house property or other heads in later years.

There is one condition. To carry forward a business loss, you must file your return of income on or before the due date. If you file late, you lose the right to carry forward that loss, with the limited exception of loss from house property. A delayed return is a common exam trap.

Keep the contrast with speculative loss in mind. Speculative business loss sets off only against speculative business income and is carried forward for four years. Equity derivatives are not speculative, so the eight-year rule applies to them.

Key formulas to remember

Nature of F&O loss: F&O loss on exchange = non-speculative business loss; Equity derivatives are not speculative transactions, so the speculative rules do not apply.
Same-year set-off: Set off against any head of income except salary; Applies in the year the loss arises. Salary income cannot be reduced by this loss.
Carry forward period: Up to 8 assessment years after the year of loss; Counted from the assessment year immediately following the loss year.
Set-off in later years: Carried-forward loss sets off only against business income; Not against salary, house property, capital gains or other sources.
Filing condition: Return must be filed on or before the due date; Otherwise the business loss cannot be carried forward.
Speculative loss contrast: Speculative loss: set off only against speculative income; carry forward 4 years; Do not apply this to equity derivatives.

How to solve Set-off and Carry Forward of Losses questions

Use this order for any question on loss treatment of F&O.

1Identify the transaction. Is it an equity derivative on a recognised exchange? If yes, the loss is non-speculative business loss.
2Check whether the question is about the same year or a later year.
3For the same year, set the loss off against all heads except salary.
4If any loss remains, carry it forward. Confirm the return was filed by the due date.
5For later years, set off the loss only against business or profession income.
6Count the years. The limit is eight assessment years after the loss year.
7Match the answer to the options. Reject any option that says four years, or that allows salary set-off.

Quickest way: Three-check shortcut

When to use it: Use it for one-line MCQs asking for the period, the income or the condition.

Recall the number: F&O means non-speculative, so 8 years.
Recall the exclusion: same year, anything except salary.
Recall the later-year limit: business income only.
If a filing date is mentioned, check it was on time.

Common mistakes in Set-off and Carry Forward of Losses

Choosing four years for the carry forward period.
Four years is the period for speculative loss, and students mix the two.
Fix: Link F&O with non-speculative and eight years. Link speculative with four years.
Setting off the F&O loss against salary.
Students assume any head can be used.
Fix: Remember the single exclusion: salary. All other heads are allowed in the same year.
Allowing carried-forward loss to reduce capital gains in a later year.
Students apply same-year rules to later years.
Fix: In later years, only business income can absorb the loss.
Ignoring the due date for filing the return.
The question seems to be only about years and heads.
Fix: Treat timely filing as a condition. A late return loses the carry forward.
Treating F&O loss as speculative loss.
Derivatives look like betting on price moves.
Fix: Equity derivatives on a recognised exchange are not speculative, so they follow non-speculative rules.

Worked examples

Example 1

Ravi has a salary income of ₹8,00,000 and income from other sources of ₹1,00,000. He has a loss of ₹3,00,000 from index futures in the same year. How much of the loss can be set off in that year, and what is carried forward?

Show the solution

The index futures loss is a non-speculative business loss.
It cannot be set off against salary of ₹8,00,000.
It can be set off against other sources income of ₹1,00,000.
Loss set off = ₹1,00,000.
Balance = ₹3,00,000 − ₹1,00,000 = ₹2,00,000.
The balance is carried forward, provided the return is filed by the due date.

Answer: ₹1,00,000 is set off in the same year and ₹2,00,000 is carried forward for up to eight assessment years.

Example 2

Meena carried forward an F&O loss of ₹2,00,000. In the next year she has a profit of ₹50,000 from F&O and capital gains of ₹1,50,000. How much of the loss can she set off, and what remains?

Show the solution

In a later year, the carried-forward loss sets off only against business income.
Her business income is the F&O profit of ₹50,000.
Capital gains of ₹1,50,000 cannot absorb the loss.
Set-off = ₹50,000.
Remaining loss = ₹2,00,000 − ₹50,000 = ₹1,50,000.
The remainder stays available within the eight-year limit.

Answer: She sets off ₹50,000 and carries forward ₹1,50,000.

Exam tips

Memorise the pair: F&O is non-speculative, carried forward eight years.
Watch for options that offer four years. They are the trap.
Read whether the question is about the same year or a later year. The allowed income differs.
If a question mentions a late return, the carry forward is lost.
In calculation questions, exclude salary first, then apply the loss to the remaining heads.

Practice questions from Accounting and Taxation

Set-off and Carry Forward of Losses in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Set-off and Carry Forward of Losses: frequently asked questions

How many years can F&O losses be carried forward?

Up to eight assessment years immediately following the year of loss. This is because F&O loss is a non-speculative business loss.

Against which income can an F&O loss be set off?

In the same year, against income under any head except salary. In later years, only against income from business or profession.

Do I need to file my return on time to carry forward the loss?

Yes. The return must be filed on or before the due date. A late return means the business loss cannot be carried forward.

Is F&O loss a speculative loss?

No. Equity derivatives traded on a recognised exchange are not treated as speculative transactions. The speculative loss rules, including the four-year limit, do not apply.