I trade in stocks and futures and options (F&O). Say, I booked a profit of around ₹5.50 lakh in FY21 but made a loss of ₹3.50 lakh in FY20. What will be my tax liability? Which income tax return (ITR) form should I file and how should I represent my loss in my return so that I can carry forward this loss and offset my liability in FY21?

Income or loss from the sale of investments in stocks would be considered as short-term capital gain or loss (STCG or STCL) or long-term capital gain or loss (LTCG or LTCL), depending on the holding period of the respective stocks.

Income or loss on account of trading in derivatives (F&O) transactions may be considered as business income or STCG or STCL (depending upon a detailed examination of factors such as volume of trade, frequency of transactions, average holding period and mode of funding).

If the income from F&O is considered business income, ITR3 will be applicable to you (assuming you satisfy all other conditions). The details of sale and corresponding purchase in relation to capital gains would need to be disclosed in Schedule CG. Further, similar details for business income would need to be disclosed in Schedule P&L and Schedule BP, respectively. However, in case the income from F&O is considered as capital gains, ITR2 will be applicable to you (assuming you satisfy all other conditions). The details of sale and corresponding purchase in relation to capital gains would need to be disclosed in Schedule CG.

As per the income tax law, within an FY, LTCL can be set off against LTCG. Also, STCL can be set off against both STCG and LTCG. Any unadjusted loss under the head capital gains can’t be set off against any other income in the same FY. You can, however, carry forward the unadjusted STCL or LTCL for eight FYs immediately succeeding the current FY and set off against future STCG or LTCG, as prescribed. In your case, the capital losses incurred in FY20 can be set off against gains made in FY21, depending on the nature of the loss (STCL or LTCL).

As per the tax law, within an FY, business loss (other than speculative business) can be set off against any head of income except income from salary. Any unadjusted loss can be carried forward for eight FYs immediately succeeding the current FY and set off against any business income, as prescribed. In your case, the business losses incurred in FY20 can be set off against business income in FY21.

Note that to enable you to carry forward business loss and capital loss incurred in FY20, the tax return is filed in accordance with the due date specified in Section 139(1). The due date for FY20 was 10 January 2021. Only if your ITR was filed on or before 10 January 2021, the said losses can be carried forward.

Further, depending on the turnover, gross receipts, income of the business, applicability of maintaining books of accounts and conducting tax audit would need to be evaluated. In case tax audit is required in your case, the due dates for filing the tax audit report and ITR for FY20 are 15 January 2021 and 15 February 2021, respectively.