Set Off and Carry Forward of Losses

Profit and losses are two sides of a coin. Losses, of course, can be painful but not as much as you think it is. The Income Tax Act provides provisions for set-off and carry-forward of losses. This loss can be from house property, business, capital loss, or any other loss. Each loss arising can be setoff against both inter-head and intra-head incomes.  Further, the excess loss can be carried forward to the next assessment years for a specific time period and can be then setoff against the income of that year. 

This article will discuss the provisions related to set-off and carry forward of losses in detail and will help a taxpayer utilise the losses to reduce the taxability of income. 

Note: Under the New Tax Regime, the loss from House Property cannot be set-off against income from any other heads. Only intra-head set-off is allowed for losses from house property.  

What Is 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. 

It means utilising losses to reduce taxable income and save taxes. 

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 under the common head of income is “Business”.

Exceptions to an intra-head set off:

1. 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.
2. Loss from an activity of owning and maintaining racehorses will be set off only against the profit from an activity of owning and maintaining racehorses.
3. 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.
4. Losses from a specified business will be set off only against the 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 under the Old Tax Regime only.

Given below are few more such instances of an inter-head set off of losses:

1. Loss from House property can be set off against income under any head upto a limit of Rs. 2 lakhs under the old tax regime only.
2. 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.

It is important to understand that any losses should first be set-off against the income from the same head. Such loss can only be set-off against incomes from other heads only when there is no income in the relevant head or the loss is more than the income under that head.  

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 filed under belated return.
• 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

Losses from Non-speculative Business (Regular Business) Loss

• The Loss should have been incurred in business
• Can be carried 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. 

* 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:

1. 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
2. Losses cannot be set off against casual income i.e. crossword puzzles, winning from lotteries, races, card games, betting etc.

Related Articles

• How to Set off & Carry Forward Capital Losses
• How to Add Previous Years’ Losses to your Income Tax Return 
• Everything an F&O trader should know about return filing
• How to Show F&O Loss in Income Tax Return