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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 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.
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:
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:
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
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:
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|
|2016-17||-||1,300||5,600||-||2,600 (5,600- 3,000)|
Set-off against LTCL
(7,000- 2,300- 800)
Set-off against STCL and LTCL
(9,000- 4,000- 1,200)
Set-off against STCL and LTCL
* 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.
|Section||Losses to be carried forward||Can be set off against Income||Time upto which losses can be carried forward||Mandatory to file return in the year of loss|
|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|
Points to note: