Set off and carry forward of Losses: The ultimate Guide

Set off of losses means adjustment of losses against income earned for the financial year and carry forward of losses means any unadjusted losses for one financial year adjusted against income of subsequent financial year.

There are in all 5 heads of income under the Income Tax Act viz., 1.Income from salaries 2.Income from house property 3.Income from business or profession 4.Income from capital gains and 5.Income from other sources.

The Income Tax Act has prescribed rules to set-off losses against income from different source under one head of income and also to adjust loss from one head against other heads of income. The tax authority also allows carry forward provision for all the unadjusted losses in subsequent year.

Set off and carry forward of losses are covered under Income Tax act 1961 from Section 70 to 74.

1. Set Off of Loss from one Source against Income from another source under the same head of income.[Sec.70]This section allows an assesse to claim losses from one source against income of other source.
2. Set Off of Loss from one Head against income from another. [Sec.71]
3. Carry forward and set off of Loss under the head ‘Income from House Property’. [Sec.71 B]
4. Carry Forward and Set Off of Business Losses [Sec.72]
5. Losses in Speculation Business [Sec.73]
6. Losses under the head “Capital Gains’. [Sec.74]
7. Losses from certain specified sources falling under the head ‘Income from Other Sources’. [Sec.74 A]

SET OFF OF LOSS FROM ONE SOURCE AGAINST INCOME FROM ANOTHER SOURCE UNDER THE SAME

HEAD OF INCOME [Sec. 70]

The section states that an assesse can set off losses incurred from one source against income earned under any other source within the same head of income. For example:  loss under the head of house property to be adjusted against salary income.

The below are exceptions to the above rules:

1. Loss from speculation business cannot be set of against profit from a non-speculation business
2. Long Term Capital Gain (LTCG) can only be set off against LTCG and cannot be set off against Short Term Capital Gain
3. Income 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 cannot be adjusted against other incomes
4. Loss from the business of owning and maintaining race horses cannot be set off against any income other than income from the business of owning and maintaining race horses.
5. Losses from an exempted source (source of income which are exempted from tax example: Agricultural income) cannot be set off against taxable Income
6. Loss from business specified under section 35AD cannot be set off against any other income except income from specified business

 SET OFF OF LOSS FROM ONE HEAD AGAINST INCOME FROM ANOTHER [Sec. 71]

In case the assesse has incurred loss under one head of income and is having income under other head of income, then he can adjust the loss from one head against income from other head in that financial year. For example adjustment of loss from business A adjusted against profit from business B.

The below are exceptions to the above rules:

1. Loss from speculation business cannot be set off against any other income heads
2. Capital Gain irrespective whether short or long cannot be set off against any other income heads.
3. Loss from the activity of owning and maintaining race houses; which cannot be set off against any other income.
4. Loss cannot be set off against winnings from lotteries, crossword puzzles, etc;
5. Business Loss cannot be set off against Salary Income. (It can be set-off against other incomes)

The unadjusted losses for the financial year after set off against income earned from different source under the same head or income of other head can be carry forwarded as per Income Tax Act. Please find the details as below.

1. CARRY FORWARD AND SET OFF OF LOSS UNDER THE HEAD “INCOME FROM HOUSE PROPERTY”.

[Sec. 71 B]

Loss under the head “Income from house property” if not set off completely against all income from income from other house property or income earned from other heads, then the same can be carried forward and adjusted up to 8 subsequent assessment years immediately succeeding the assessment year for which the loss was first computed

2.CARRY FORWARD AND SET OFF OF BUSINESS LOSSES. [Sec. 72]

The losses loss arising in a business or profession can be adjusted in a financial year with any other income earned from other heads of income except income from salary. Whereas the carry forward of losses.

But in case of carry forward of business losses the below restriction applies:

1. Any business loss cannot be carried forward unless income tax return is filed within prescribed due date as per section 139.
2. Business loss can only be carried forwarded for a period not more than eight assessment years.
3. Carry forwarded business loss can only be set off against Business Income

3.LOSSES IN **SPECULATION BUSINESS [Sec. 73]

Any unadjusted speculative business losses can be carry forwarded for a period not more than four assessment years immediately succeeding the assessment year for which the loss was first computed only if income tax returns are filed within the prescribed due dates.

Any such loss incurred on speculative business carried on by the assesse can be carried forward and set off against only profits and gains of another speculation business.

(** Here Speculative business means business of transacting contract of purchase or sale of any commodity including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scripts. In simple terms any profit or loss from derivative trading carried out through a recognized stock exchange shall not be treated as profit or loss from speculative business)

4.LOSSES IN SPECIFIED BUSINESS [Sec. 73A]

In a financial year any loss computed in respect of any specified business referred to in section 35AD shall only be set off against profits and gains of any other specified business. The loss amount cannot be adjusted under any other head.

Where for any assessment year any loss computed in respect of the specified business has not been wholly set off the same can be carried forward and set off against the profits and gains of any specified business carried on by him assessable for any subsequent assessment years.

Such losses incurred under specified business referred in section 35A can be carried forward for any number of years if proper return has been filed before the due date of income tax return filing.

5.LOSSES UNDER THE HEAD “CAPITAL GAINS” [Sec. 74]

If there are unadjusted capital gain losses then the same can be carried forward up to subsequent eight assessment years immediately succeeding the assessment year for which the loss was first computed.

Such losses can be carry forwarded only if proper income tax return is filed providing details and computation of such losses within the prescribed due date.

Any losses under the head “Capital gains” once carried forward can be adjusted as below:

﴾a﴿ any short term capital gain shall be carry forwarded and set off only against income from “Capital gains” irrespective whether such gain is earned from a short term capital asset or long term capital asset.

﴾b﴿ any long term losses can be carried forward and set off only against income from “Capital gains” earned from Long term capital asset.

6.LOSSES FROM CERTAIN SPECIFIED SOURCES FALLING UNDER THE HEAD “INCOME FROM OTHER

SOURCES” [Sec. 74A]

Any amount of  loss incurred by the assesse from the activity of owning and maintaining race horses in any assessment year can only be set off against income earned from owning and maintaining race horses in that year. If such a loss is unabsorbed in that financial year then the same shall be carried forward to the following assessment year up to not more than four subsequent assessment years.

No such loss shall be carried forwarded unless such loss details and calculation are submitted through income tax return within the due date of return filing provided under section 139.

Such carry forwarded loss from activity of owning and maintaining race horses can be adjusted only against income from the activity of owning and maintaining race horses in any subsequent years.

1. LOSSES INCURRED FROM “INCOME FROM SALARY” head are not be adjusted against income earned from any other head of income. Such unadjusted loss from salary cannot be carry forwarded in any subsequent assessment year.
2. LOSSES INCURRED FROM ACTIVITIES OF LOTTERIES, CROSSWORD PUZZLE, GAMBLING OR BETTING (OTHER INCOME) are not be adjusted against income earned from any other head of income in a financial year. Such unadjusted losses from such activities are not allowed to be carried forward in any subsequent assessment year.

THE ABOVE DETAILS ARE SUMMARIZED IN THE BELOW TABLE

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