Income Tax Rules: Can You Adjust Stock or Derivatives Losses Against Mutual Fund Long-Term Capital Gains?

Investors often face situations where some investments generate profits while others result in losses. A common question for taxpayers is whether losses from the stock market or derivatives can be set off against gains earned from mutual funds. Rajesh Singh from Ghaziabad recently raised a similar query: If he incurs a loss of ₹5 lakh from stock derivatives in FY 2025–26, can it be adjusted against long-term capital gains (LTCG) from mutual funds? To address this, Moneycontrol consulted tax expert and Chartered Accountant Balwant Jain.

What Do the Income Tax Rules Say?

Under the Income Tax Act, losses can be adjusted or set off against gains — but only under specific conditions.

Jain explains that a loss must first be set off within the same head of income. If the final result still reflects a net loss, then in limited cases, it can be set off against income under a different head — with certain restrictions.

For instance:

• Regular business loss can be set off against all incomes except salary during the same financial year.

• Capital losses fall under the “Income from Capital Gains” category and must be adjusted within the same head.

Speculative vs. Non-Speculative Losses

Not all trading losses are treated equally. Jain highlights the key difference:

🔹 Speculative Loss

• Occurs from transactions without actual delivery of securities

• Cannot be set off against other types of income

• Can only be carried forward for up to four assessment years

• Can be set off only against speculative business income

🔹 Non-Speculative Loss

• Derivatives trading (F&O) is considered non-speculative business income

• Taxed under “Profits & Gains from Business or Profession”

• Non-speculative losses can be set off against income under other heads including capital gains, subject to overall conditions

How Are Share and Mutual Fund Gains Taxed?

Shares and mutual funds are generally taxed under Capital Gains:

Set-Off Rules for Capital Losses

Jain further clarified the following:

✔ Short-Term Capital Loss (STCL)

Can be adjusted against:

• Short-term capital gains (STCG)

• Long-term capital gains (LTCG)

✔ Long-Term Capital Loss (LTCL)

Can be adjusted only against:

• Long-term capital gains (LTCG)

Can Stock Loss Be Adjusted Against Mutual Fund Gains?

Yes — depending on the type of loss.

Rajesh Singh may adjust:

• Short-term losses from shares against
  ➝ STCG or LTCG from mutual funds

• Long-term losses from shares
  ➝ only against LTCG from mutual funds

Derivative losses, being non-speculative business losses, can also be adjusted against capital gains including those from mutual funds.

Taxpayers should verify whether their equity transaction falls under short-term or long-term eligibility before claiming set-off.

A Final Word of Advice

Tax experts always suggest maintaining clear records and understanding the correct classification of each transaction. Incorrect reporting can lead to tax notices or disallowance of the loss claim.

Disclaimer: The views shared by experts are independent opinions and do not reflect the stance of this publication. Investors should consult a certified tax professional before making financial decisions.