SET OFF & CARRY FORWARD OF LOSSES

SET OFF AND CARRY FORWARD OF LOSSES

The profit and losses are the two side of a coin. Losses, of course are hard to digest. However, the Income Tax Act in India does provide taxpayers with 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.

1. What do you mean by 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 intra-head set-off or an inter head set off.

2. Wha is Intra head set off?

It means loss of one source of income can be set off against income from another source of income but in the same head of income.

Exceptions:

1. Speculative business loss can be set off against speculative business income.
2. Specifies business loss (Section 35AD) can be set off against speculative business income.
3. Long term capital loss can be set off against long term capital gain.
4. Loss from owning & maintaining race horses can be set off against income from owning & maintaining race horses.

3. What is Inter head set off?

It means loss under one head of income can be set off against income from another head of income but in the same previous year.

NOTE:

For carry forward losses inter head adjustment not allowed.

Exceptions:

1. Speculative business loss can be set off against speculative business income.
2. Specifies business loss (Section 35AD) can be set off against speculative business income.
3. Long term capital loss can be set off against long term capital gain.
4. Loss from owning & maintaining racehorses can be set off against income from owning & maintaining racehorses.
5. Short term capital losses (STCL) can be set off only against STCG & LTCG.
6. Loss from business cannot be set off against salary.

4. What do you mean by carry forward of losses?

After making the appropriate and permissible intra 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 rule as regards carry forward differs slightly for different heads of income.

First rule to carry forward of loss is to file the return on income on or before the due date.

These have discussed here:

Steps for Carry forward.

NOTES:

1. Loss from House Property which can be set off against income from other heads is maximum Rs. 2,00,000.
2. It is to be remembered that once the loss is carried forward, it can only be set off only against the income from the same head in the forthcoming Assessment Years.
3. Wherever the income is exempt then losses does not have any tax treatment it means it should be ignored.
4. Loss from any lottery, card games, races etc. are not eligible for set off & C/F & Losses cannot be set off against the income referred u/s 115BB i.e. lottery income, crossword puzzles, income in TV shows etc.
5. B/f losses from a business can be set off even if such business is not continued.
6. If there is income under any head & eligible loss other any other head, such loss shall be first set off against the income before c/f of such losses.
7. Set off of losses not permissible against unexplained income, Investment, money etc. chargeable u/s 68 to 69D.
8. Order for set off losses.

1. Current year depreciation.
2. Brought forward losses from business or profession.
3. Unabsorbed Depreciation.