Gains and losses are the two sides of a coin. Losses, of course, are hard to accept in business. However, the Income tax law in India provides taxpayers with some benefits of incurring losses too. The law contains provisions for set-off and carries forward of losses discussed in detail in this article.
Set-off of losses
Set-off of losses means adjusting the losses against the Profit earned or income of that particular year. Losses not set off against profits or gain in the current year can be carried forward to the subsequent years for set-off against Income of those years. A set-off could be an inter-head set-off or an intra-head set-off.
Intra-head Set-Off
The losses of one source of income can be set off against the payment or Profit earned from another under the same head of Income. E.g., Loss from Business X can be set off against Profit earned from Business Y, where Business X is one source, and Business Y is another source, and the common head of Income is "Income from Business".
Exceptions to an intra-head set off:
1. Losses from a Speculative business can only be set off against the Profit or gain of the speculative business. Assessee cannot adjust the losses of speculative business with the Income from any other business or profession.
2. Loss from owning and maintaining racehorses will be set off only against the Profit from the activity of owning and maintaining racehorses.
3. Long-term capital loss can only be adjusted towards long-term capital profit. However, a short term capital loss can be set off against both short-term capital gain and long-term capital gains.
4. Losses from a specified business can be set off only against a profit of specified businesses. But the losses from any other business or profession can be set off against profits from the specified businesses.
Inter-head Set-Off
After the intra-head adjustments, the assessee can set off remaining losses against Income from other heads. E.g. Loss incurred from house property can be set off against Income from Salary. Below are few more examples of an inter-head set off of losses:
1. Loss from House property will be set off against income under any head
2. Business loss other than the speculative business can be set off against any head of Income except Income from salary.
One also needs to 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 the activity of owning and maintaining race-horses
Carry forward of losses
After making the correct and permissible inter-head and intra-head adjustments, there can still be unadjusted losses remaining. The unadjusted losses can be carried forward to future assessment years for adjustments against the Profit of these years. The rules regarding carrying forward differ slightly for different heads of Income.
These have been discussed here:
Losses from House Property :
It can be carried forward up to the following eight assessment years from the assessment year in which the loss was incurred.
It will be adjusted only against income from house property.
It can be carried forward even if the return of Income for the loss year is belatedly filed.
Losses from Non-speculative Business (Regular Business) Loss
It can be carried forward to the following eight assessment years from the year the loss was incurred.
Can be set off only against income or Profit from profession or business
Not compulsory to continue the business at the time of set off in future years
It can't be carried forward if the return is not filed within the original due date.
Speculative Business Loss
It can be carried forward up to the following four assessment years from the year in which the loss was incurred
It will be set off only against income or Profit from speculative business
It can't be carried forward if the Income-tax return is not filed before or on the due date.
Not necessary to carry the business at the time of adjusting in future years
Specified Business Loss under 35AD
No time boundaries to carry forward the loss from the specified business under 35AD
Not necessary to carry the business at the time of set off in future years
It can't be carried forward if the Income-tax return is not filed within the due date
Can be adjusted only against Profit from specified business under 35AD
Capital Losses
It can be carried forward up to the following eight assessment years from the year in which the losses were incurred
Long term capital losses can be set off 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
It can't be carried forward if the return is not filed within the original due date
Losses from owning and maintaining race-horses
It can be carried forward up to the following four assessment years from the year in which the losses were incurred
It can't be carried forward if the return is not filed within the original due date
It can only be adjusted against profit/Income from owning and maintaining racehorses only
Points to note:
An assessee incurring a loss from an income source, Income from which is otherwise exempt from tax, can't adjust these losses against Profit from any taxable source of Income.
Losses cannot be set off against casual Income, i.e. crossword puzzles, winning from lotteries, races, card games, betting etc.
Mandatory Filing of a Return
To keep track of your losses, the income tax department has laid out that losses cannot be carried forward for a year unless that year's Income Tax return is filed before the original due date.
Even if it's a loss income tax return, you don't have earned any income – do file your income tax return before the original due date.