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Set Off &Carry forward of losses

We all know that a person is required to pay taxes on profits/Income earned during a financial year. But the question which arises frequently in the mind of Individuals is what if they have incurred losses during a financial year?

If an Individual has profit and losses simultaneously he /she should pay taxes on the net profit after deducting the losses. However there is no need to pay taxes if an individual has incurred only losses during the financial year. Tax payers are not much aware about the provisions of Set off and carry forward of losses. In this article we will explain the provision of Set off and Carry forward of losses.

So the first question which arises is what is the meaning of Set off and Carry forward of losses?
“Set off”
means adjustments of losses against the profit earned from the same head/source of income or from different heads.

“Carry forward” if the losses cannot be set off in the same financial year due to deficit of profit then such losses are carried forward next year and are adjusted against the profit available for that year.

Image set

The Provisions of Set off and Carry forward of losses are as follows:

  • Intra – head Set offThe adjustment of Losses from a particular head of Income with the profit against the same head is termed as Intra head adjustment.

  Example.
Income from House property A   Rs. 50,000
Loss from House property B        Rs. 30,000
Income from House Property      Rs. 20,000
                         

In the above example losses from House Property B is getting set off in the same head from Income of House property A.

There are some restrictions or we can say some exceptions in adjustment of losses within the same head. The restrictions are as follows.
 1.Long term Capital loss can be set off only against Long term capital gain. There is no such restriction for Short term capital loss. Short term capital loss can be set off against both long term and Short term Capital gain. Let us understand this with an example.

 Example1   

 Long Term Capital Loss          Rs. 75,000
Short Term Capital Gain        Rs. 1, 00,000
Income from Capital Gain     Rs. 1, 00,000
                                       

 Example2    

  Short term Capital Loss           Rs. 1, 50,000
  Long term Capital Gain           Rs. 2, 00,000
Income from Capital Gain       Rs.50, 000                                                                 

  2.Loss from speculative business can be set off only against income speculative business there is no such restriction for loss from non- speculative business. Let us understand this with an example.

     Example1.    

 Loss from business A (speculative)                            Rs. 65,000
Profit from business B (non speculative)                 Rs. 1, 00,000
Income from business                                                  Rs.1, 00,000

   Example2.    

  Loss from business A (Non-Speculative)                   Rs. 2, 50,000
Profit from business B (Speculative)                          Rs.4, 50,000

 Income from business                                                  Rs.2, 00,000

 3.No loss can be set off against income from winnings 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. It is to be noted that no expenses incurred against such income or loss can be claimed. Let us understand this with an example.

 Example1. 

   Income from winning from race horse                         Rs. 1, 20,000
    Expenses Incurred                                                               Rs. 7,500
   Income from Other Sources                                              Rs. 1, 20,000       

Example2.    

Income from Crossword Puzzle                                     Rs. 4, 00,000
Loss from card Game                                                       Rs. 2, 50,000
Income from Other Sources                                           Rs. 4, 00,000

 4.Loss from the business of owing and maintaining of race horses can be set off only against such income. It cannot be set off against any income other than the income from the business of owing and maintaining race horses. Let us understand this with an example.

5.Loss from business specified under section 35AD cannot be set off against any other income except income from specified business.

  • Inter-head set off– Once the intra-head adjustments are made the next step is to make inter head adjustments. Inter head set off means to set off the losses incurred from one head against income under other head of income.

Similar to Intra head set off there are some restrictions and exceptions for Inter – head set off. The restrictions are as follows:
   1. Losses under the head “Capital gain” cannot be set off against income from other heads of income. However Loss from other heads can be set-off against Capital Gains. Let us understand this with an example.

Example1.

Capital Loss                                   Rs. 1, 25,000
Income from house property    Rs. 2, 50,000                                                      

Total Income                                 Rs. 2, 50,000

Example2. 

Loss from Business                        Rs. 4, 25,000
Income from Capital gains           Rs. 5, 65,000
Total Income                                   Rs. 1, 40,000

2.
Business Losses cannot be set off against Salary income.

3.No loss can be set off against income from winnings 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.

4.Loss from speculative business cannot be set off against any other income

5.Loss from the business of owning and maintaining race horses cannot be set off against any other income.

6.Loss from business specified under section 35AD cannot be set off against any other income (section 35AD is applicable in respect of certain specified businesses like setting up a cold chain facility, setting up and operating warehousing facility for storage of agricultural produce, developing and building housing projects, etc.)

As mentioned earlier that if the losses cannot be set off in the same financial year due to deficit of profit then such losses are carried forward next year and are adjusted against the profit available for that year. However, the loss so carried forward can be set-off only against same head of income. The time limit for the losses to be carried forward is

Section Type of loss to be carried forward to next year(s) Profit against which carried forward loss can be off in subsequent year Maximum Permissible period.
71B Unabsorbed loss from house property Income from House Property 8 assessment years
72 Unabsorbed business loss (non- speculative) Profit and Gains from Business or profession 8 assessment years
73 Loss from speculation business Income from speculation business 4 assessment years
73A Loss from specified business under section 35AD Profit from specified business under section 35AD Indefinite period
74 Long-term capital loss Long-term capital gains 8 assessment years
74 Short-term capital loss Short/Long-term capital gains 8 assessment years
74A Loss from the activity of owning and maintaining race horses – Income from the activity of owing and maintaining race horses. – 4 assessment years
  • Order of Set-off of losses – In case where profits are insufficient to absorb brought forward losses, current depreciation and current business losses, the same should be deducted in the following order

   i.Current scientific research expenditure
  ii.Current depreciation
  iii.Brought forward business losses
  iv.Unabsorbed family planning promotion expenditure
  v.Unabsorbed depreciation
  vi.Unabsorbed scientific research capital expenditure
  vii.Unabsorbed development allowance
 viii.Unabsorbed investment allowance.

  •   Exempt income –The losses from exempted source of income cannot be adjusted against taxable income.

For further queries please visit our website www.makeyourtax.com or you can contact us at info@makeyourtax.com

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