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Set off and Carry forward of losses under Income Tax Act

Profit and loss are part of any financial activity. However, losses are hard to stomach. Nevertheless, Income tax law in India provide some benefit upon incurring losses. Law has provided provision to set – off and carry forward those losses.


Set off of Losses


The adjustment of losses against income or profit in a particular year is called set off. Assessee can set off against income in either an intra-head or inter-head way (explained in detail below).


However, losses not set off against income can be carried forward to subsequent years and set off against income earned in that year.


Intra-head set off

If in any year the taxpayer has incurred loss from any source under a particular head of income, he is allowed to adjust such loss against income from any other source falling under the same head. This adjustment of loss within same head of income is called inter-head set off.


For eg: Loss from Business A can be set off against profit from Business B, where Business A is one source and Business B is another source and the common head of income is “Income from Business & Profession”.


However, there are some exceptions to an intra-head set off

  • Losses from a Speculative business will only be set off against the profit of the speculative business. One cannot adjust the losses of speculative business with the income from any other business or profession.

  • Long-term capital loss will only be adjusted towards long-term capital gains. However, a short-term capital loss can be set off against both long-term capital gains and short-term capital gain.


Inter-head set off

The next step after making any intra-head adjustments is to make an inter-head adjustment. If the taxpayer suffers a loss under any one head of income and has income under another head of income in any given year, he can adjust that loss to the other head.


However, following losses can’t be set off against any other head of income:


  • Loss from speculative business cannot be set off against any other income. However, non-speculative business loss can be set off against income from speculative business.

  • Loss under head “Capital gains” cannot be set off against income under other heads of income.

  • No loss can be set off against income from winnings from lotteries, crossword puzzles, race including horse race, card game, and any other game of any sort or from gambling or betting of any form or nature.

  • Business loss other than speculative business can be set off against any head of income except income from salary.

  • Loss under the head house property shall be allowed to be set-off against any other head of income only to the extent of Rs. 2,00,000 for any assessment year.

Further points to be noted for set off:


A taxpayer incurring a loss from a source, income from which is otherwise exempt from tax, cannot set off these losses against profit from any taxable source of Income

E.g., Agricultural income is exempt from tax, hence, if the taxpayer incurs loss from agricultural activity, then such loss cannot be adjusted against any other taxable income.


Rules for set off of losses in current year is depicted below


Carry forward of losses


After making the appropriate and permissible intra-head and inter-head adjustments, there could still be unadjusted losses. These unadjusted losses can be carried forward to future years for adjustments against income of those years.


The rules as regards carry forward differ slightly for different heads of income which are tabulated below:

Losses to be carried forward

Can be set off against

Time upto which losses can be carried forward

Mandatory to file return in the year of loss

Loss from House Property

Income from house property

Next 8 assessment years

No

Loss from Normal business

Income from business

Next 8 assessment years

Yes

Loss from speculative business

​Income from speculative business

Next 4 assessment years

Yes

Short term capital loss (STCL)

STCG and LTCG

Next 8 assessment years

Yes

Long term capital loss (LTCL)

​LTCG

Next 8 assessment years

Yes

Treatment of Loss as per New Tax Regime


With the introduction of Section 115BAC in Budget 2020, there were few changes in the treatment of losses as follows:


  • House Property Loss: As per the new income tax regime, only current year losses from house property can be set off against income from house property and not against any other Income. Moreover, losses from income from house property cannot be carried forward in the new income tax regime.


  • Setting-Off Business/Profession Loss: In the case of a business income, an individual/ HUF cannot set off the brought forward business loss and cannot carry forward these B&P losses if they relate to deductions/exemptions withdrawn under clause (i) of sub-section (2) of section 115BAC. In simple terms, you can carry forward short-term & long-term capital losses, derivatives trading losses in the new tax regime. Since, only the losses relating to deductions & exemptions withdrawn under clause (i) of sub-section (2) of section 115BAC cannot be set off or carried forward, for eg: additional depreciation, investment allowance, capital expenditure under section 35AD, etc.

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