SET OFF AND CARRY FORWARD LOSSES

 SET OFF AND CARRY FORWARD LOSSES

Specific provisions have been made in the Income-tax Act, 1961 for the set-off and carry forward of losses. In simple words, “Set-off” means adjustment of losses against the profits from another source/head of income in the same assessment year. If losses cannot be set-off in the same year due to inadequacy of eligible profits, then such losses are carried forward to the next assessment year for adjustment against the eligible profits of that year. The maximum period for which different losses can be carried forward for set-off has been provided in the Act.

INTRA HEAD ADJUSTMENT

Intra-head Adjustment refers to the process of setting off a loss from one source of income against income from another source under the same head of income in the same assessment year.

EXCEPTIONS

1)        LONG TERM CAPITAL LOSS:

Ø  Long term capital loss can be set off only against long capital gain

Ø  Short term capital loss can be set off against STCG or LTCG.

2)        SPECULATION LOSS:

Ø  A loss in speculation business can be set-off only against the profits of any other speculation business and not against any other business or professional income.

Ø  However, losses from other business can be adjusted against profits from speculation business.

3)        LOSS FROM THE ACTIVITY OF OWNING AND MAINTAINING  RACE  HORSES:

Ø  Such loss can be set-off only against income from the activity of owning and maintaining race horses.

4)        LOSS FROM SPECIFIED BUSINESS:

Ø  In case of an assessee exercising the option of shifting out of the default tax regime provided under section 115BAC(1A), loss in any specified business referred in section 35AD can be set-off only against any other specified business.

Ø  However, losses from other business can be set-off against profits from specified business

5)        LOSS FROM WINNING LOTTERIES, CROSSWORD PUZZLES AND CARD GAMES ETC.

Ø  It can not be set off against winning from lotteries

Summary Table for Quick Reference

Nature of Loss

Can be set off against...

Normal Business Loss

Any Business Profit (except Speculative)

Speculative Loss

Only Speculative Profit

Specified Business (35AD)

Only Specified Business Profit

Long-Term Capital Loss

Only Long-Term Capital Gain

Short-Term Capital Loss

Both STCG and LTCG

Race Horse Maintenance

Only Race Horse Income

 

INTER- HEAD ADJUSTMENT

Inter-head Adjustment is the process of setting off a loss from one head of income (e.g., House Property) against the income from any other head (e.g., Salary or Business) in the same assessment year.

  • The Sequence: You must always finish Intra-head adjustment first. Only if the loss still remains do you move to Inter-head adjustment.
  • The Goal: To reduce the overall taxable income of the individual.

POINTS TO BE REMEMBERED

1.        Loss under the head “Income from house property”

Ø  It can be set off against Salary,Business,Capital Gains or Income from other sources

Ø  Loss from HP can be set off against other income upto Rs.2,00,000 only.

2.        Loss under the head Business or Profession”

Ø  Business income can be set off against HP Income, Capital Gains or other income

Ø  Business loss or Loss from profession cannot be set of against income from Salary.

3.        Loss under the head Capital gain

Ø  Loss under the head capital gain can be set off against income under Capital gains only.

Ø  Long term Capital loss can be set off only against long term capital gain

Ø  STCL be set off against STCG or LTCG.

Ø  Capital gain losses cannot be set off against HP,SALAERY,BUSINES OR IFOS.

4.        Loss from Speculation Business

Ø  Can be set off only against speculative income

Ø  It cannot be set off against SALARY,HP,CAPITAL GAIN,IFOS OR Non-Speculative income

5.        Loss under any other head other than capital Gain

Ø  Can be set off against any other heads of income except speculative business income and income from horse races.

 Summary Table: Inter-head Adjustment

Type of Loss incurred

Can it be adjusted against other heads?

Specific Restriction

House Property Loss

YES

Limited to ₹2 Lakhs maximum per year.

Non-Speculative Business Loss

YES

Cannot be adjusted against Salary.

Speculative Business Loss

NO

Can only be adjusted against Speculative Profit.

Specified Business (35AD) Loss

NO

Can only be adjusted against 35AD Profit.

Capital Loss (STCL or LTCL)

NO

Cannot be adjusted against any other head.

Race Horse Maintenance Loss

NO

Can only be adjusted against the same source.

Loss from Other Sources (General)

YES

General losses (e.g., from a side-activity) are allowed.

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