Profit and losses are two sides of a coin. Losses, of course, are hard to digest. However, the Income-tax law in India does provide taxpayers some benefits of incurring losses too. The law contains provisions for set-off and carry forward of losses which are discussed in detail in this article.
Set Off of Losses
Set off of losses means adjusting the losses against the profit or income of that particular year. Losses that are not set off against income in the same year can be carried forward to the subsequent years for set off against income of those years. A set-off could be an intra-head set-off or an inter-head set-off.
Intra-head Set Off
The losses from one source of income can be set off against income from another source under the same head of income.
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 “Business”.
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.
- Loss from an activity of owning and maintaining race-horses will be set off only against the profit from an activity of owning and maintaining race-horses.
- 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.
- Losses from a specified business will be set off only against profit of specified businesses. But the losses from any other businesses or profession can be set off against profits from the specified businesses.
Inter-head Set Off
After the intra-head adjustments, the taxpayers can set off remaining losses against income from other heads.
Eg. Loss from house property can be set off against salary income.
Given below are few more such instances of an inter-head set off of losses:
- Loss from House property can be set off against income under any head upto a limit of Rs. 2 lakhs.
- Business loss other than speculative business can be set off against any head of income except income from salary.
One needs to also note that the following losses can’t be set off against any other head of income:
a. Speculative Business loss
b. Specified business loss
c. Capital Losses
d. Losses from an activity of owning and maintaining race-horses
e. Losses from sources of Lotteries, crosswords, Puzzles, card games other gambling.
f. Losses from exempted sources of income are not eligible for adjustment against taxable income.
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 these years. The rules as regards carry forward differ slightly for different heads of income.
These have been discussed here:
Losses from House Property :
- Can be carry forward up to next 8 assessment years from the assessment year in which the loss was incurred
- Can be adjusted only against Income from house property
- Can be carried forward even if the return of income for the loss year is belatedly filed.
- If individuals, HUF,AOP, BOI, opting to pay taxes under old tax regime, loss under the head income from house property firstly setoff against income from any other head to the extent of Rs 2,00,000 during the same year, unobserved loss will be carried forward to the following assessment year to be setoff against income under the head income from house property of future years.
- Under the new tax regime, loss under the head income from house property would not be allowed to be set off against income under any other head, additionally losses of the earlier years will not be allowed to the future years.
Let’s try to understand this with below example
Mr Rama aged 45 years submits the following income pertaining to the FY 2023-24
- Income from salary Rs 4,20,000
- Loss from let out property Rs -2,30,000
- Business Loss Rs -1,20,000
- Bank Interest received Rs 85,000
Computation of income under old tax regime
Particulars | Amount | Amount |
Income From Salary Less : Loss from house property of Rs 2,30,000 restricted to Rs 2,00,000 Income from other sources (interest income) Less : Business Loss of Rs 1,20,000 setoff to the extent of Rs 85,000 Gross total income | 4,20,000 -2,00,000 | 2,20,000 - 2,20,000 |
85,000 -85,000 | ||
Note :- (a) The balance loss of Rs 30,000 from house property to be carried forward to next assessment year for set-off against income from house property of that year.
(b) Remaining business loss of Rs 35,000 will be carried forward as it cannot be set off against salary income and allowed for set-off against income from house property of that year.
Computation of income under New tax regime
Particulars | Amount | Amount |
Income From Salary Income from other sources (interest income) Less : Business Loss of Rs 1,20,000 set off to the extent of Rs 85,000 Gross total income | 85,000 -85,000 | 4,20,000 - |
4,20,000 |
Note : (a) loss from house property cannot be set off against income under any other head. Therefore, the entire loss of Rs 2,30,000 from house property to be carried forward to next assessment year for set-off against income from house property of that year.
(b) Remaining business loss of Rs 35,000 will be carried forward as it cannot be set off against salary income.
Losses from Non-speculative Business (Regular Business) Loss
- The Loss should have been incurred in businessThe Loss should have been incurred in business
- Can be carry forward up to next 8 assessment years from the assessment year in which the loss was incurred
- Can be adjusted only against Income from business or profession
- Not necessary to continue the business at the time of set off in future years
- Cannot be carried forward if the return is not filed within the original due date.
- Person who incurred the loss alone is entitled to carry forward & set-off the loss (it can not transferred to any other person)
Speculative Business Loss
- Can be carry forward up to next 4 assessment years from the assessment year in which the loss was incurred
- Can be adjusted only against Income from speculative business
- Cannot be carried forward if the return is not filed within the original due date.
- Not necessary to continue the business at the time of set off in future years
Specified Business Loss under 35AD
- No time limit to carry forward the losses from the specified business under 35AD
- Not necessary to continue the business at the time of set off in future years
- Cannot be carried forward if the return is not filed within the original due date
- Can be adjusted only against Income from specified business under 35AD
- Not necessary to continue the business at the time of set off in future years
Capital Losses
- Can be carry forward up to next 8 assessment years from the assessment year in which the loss was incurred
- Long-term capital losses can be adjusted only against long-term capital gains.
- Short-term capital losses can be set off against long-term capital gains as well as short-term capital gains
- Cannot be carried forward if the return is not filed within the original due date
Let us understand with an example-
Mr P has invested in equity shares. Below are the details related to his capital gain/loss transactions for different years.
| A.Y. | STCL during the year | LTCL during the year | STCG during the year | LTCG during the year | STCG taxable | LTCG taxable | Balance STCL and LTCL to be c/f |
|---|---|---|---|---|---|---|---|
| 2020-21 | 3,000 | 1,000 | - | - | - | - | STCL- 3,000 LTCL- 1,000 |
| 2021-22 | - | 1,300 | 5,600 | - | 2,600 (5,600- 3,000) Set-off against LTCL | - | STCL- Nil LTCL- 2,300 |
| 2022-23 | 800 | - | - | 7,000 | - | 4,700 (7,000- 2,300- 800) Set-off against STCL and LTCL | STCL- Nil LTCL- Nil |
| 2023-24 | 1,200 | 4,000 | 3,000 | 9,000 | 3,000* | 3,800* (9,000- 4,000- 1,200) Set-off against STCL and LTCL | STCL- Nil LTCL- Nil |
* Assuming there is 15% tax on STCG and 20% tax on LTCG. The order of adjusting STCL and LTCL is not prescribed in the Act. Hence, the STCL and LTCL are first adjusted with LTCG of the year to reduce the tax liability.
Losses from owning and maintaining race-horses
- Can be carry forward up to next 4 assessment years from the assessment year in which the loss was incurred
- Cannot be carried forward if the return is not filed within the original due date
- Can only be set off against income from owning and maintaining race-horses only
Points to note:
- 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
- Losses cannot be set off against casual income i.e. crossword puzzles, winning from lotteries, races, card games, betting etc.
Section | Losses to be carried forward | Can be set off against Income | Time up to which losses can be carried forward | Mandatory to file return in the year of loss before the due date? |
|---|---|---|---|---|
32(2) | Unabsorbed depreciation | Any income (other than salary) | No time limit | No |
71B | Loss from House property | Income from house property | 8 years | No |
72 | Loss from Normal business | Income from business | 8 years | Yes |
73 | Loss from speculative business | Income from speculative business | 4 years | Yes |
73A | Loss from specified business | Income from specified business | No time limit | Yes |
74 | Short term capital loss (STCL) | Short term capital gain (STCG) and long term capital gain (LTCG) | 8 years | Yes |
Long term capital loss (LTCL) | LTCG | 8 years | Yes | |
74A | Loss from owning and maintaining horse races | Income from owning and maintaining horse races | 4 years | Yes |
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