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Set-Off And Carry Forward Losses For Income Tax Purposes

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There are various Income Tax Rules, under which you can set-off the losses against the gains or carry forward them to set-off in subsequent years. But these rules have to be followed with particular details for set off and enjoy tax benefits.

Set-off of losses

Under Section 70, the loss incurred from any source of income under any head can be sett off against the gains from any other source under the same head. This is known as Intra-Head Adjustment. Eg: A short term capital loss of Rs. 10,000 and a long term capital loss of Rs. 20,000 can both be set off against LTCG of Rs. 50,000. But there are few exceptions as follows:

  1. Loss from the activity of owning and maintaining race-horses.
  2. Losses from speculation business.
  3. Long Term Capital Losses can be set off against LTCG only and not against Short Term Capital Gain whereas STCL can be set off against both LTCG and STCG.

If the losses are not adjusted Intra-Head then they can be adjusted Inter-Head. Under Section 71, the loss under any head of income can be set off against any other income head for the same assessment year. Eg: The loss from house property in assessment year 2010-11 can be set off  against salary in 2010-11 if the set off against house property gain from other source is not possible. The exceptions are as follows:

  1. Loss from the activity of owning and maintaining race-horses.
  2. Losses from speculation business.
  3. Losses from capital gains.
  4. Losses from business and profession cannot be set off against the salary.

Set-Off And Carry Forward Losses

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Set-off And Carry Forward Losses For Different Heads Of Income

The losses from different sources are treated differently when they are carried forward. This has been described under section 73 and 74 as follows:

  1. Income from salary cannot have any losses.
  2. Income from house property: Loss can be set off against any income under any head in current year. If not set off, it can be carried forward to next 8 assessment years (AY) and set off only against income from house property.
  3. Profits from Business or Profession
    • The loss of speculation business can be set off against loss from speculation business only. Whereas the loss from non-speculative business can be set off against the both speculative and non speculative business. They can be carried forward to next 4 AY and set off in the same way.
    • Losses from owning and maintaining race horses can be set off against the gains from same source. It can be carried forward to next 4 AY and set off against same income source.
    • Other losses can be set off against any income source except salary. It can be carried forward to next 8 AY and set off against any income.
  4. Capital Gains
    • Long Term Capital Losses can be set off against LTCG only. It can be carried forward to next 8 AY.
    • STCL can be set off against both LTCG and STCG. It can be carried forward to next 8 AY and set off against STCG only afterwards.
  5. Other Income Sources : Loss can be set off against any source under any head but cannot be carried forward.

Note: You must file the ITR on or before the due date to have the benefit of set off or carry forward except in case in house property.

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