All about set off and carry forward of losses

There are certain transactions where profits and losses occur during the process. Profits however are taxable in the eyes of Income tax but losses provide certain benefits to the assessees. These benefits are available to individuals as well as businesses. Set off is a way to reduce taxable income for a particular financial year and carry forward of losses provide a provision for future years to reduce taxable incomes. Losses can occur only in the House property, Business, or capital gains head of income. One cannot incur losses in salaries or income from other sources.

We will discuss how these two points of set off and carry forward of losses will help taxpayers in planning their finances and incomes.

Set off :
Set off of losses means adjusting of losses against the income earned during the current financial year. This means the taxable income is reduced by the amount of losses incurred. Set off can be intra head or inter head. This means the set off of losses can be done against the similar head of income or against any different head of income.

What is Intra-head set off?
Intra head set off is adjusting the losses of one source of income with another source of income. However, this set off of losses is to be done against the same head of income. For example, if a taxpayer has a business loss from one source of income, they can set it off against the profit from another business source of income. Here the head of income remains the same i.e. Profits and gains from business or profession.

Exceptions to intra-head set off:

• Losses from a Speculative business will only be set off against the profit of the speculative business. One cannot adjust the losses of speculative business with the income from any other business or profession.
• Losses from owning and maintaining horse races can be set off against income from owning and maintaining horse races only.
• Long-term capital losses can only be set off against long-term capital gains. They cannot be set off against short term capital gains.
• Short-term capital losses can be set off against long-term and short-term capital gains.
• Losses from the specified business can only be set off against profit from the specified business. But the losses from any other businesses or profession can be set off against profits from the specified businesses.

What is inter-head set off?
Inter head set off means adjusting the losses from one head of income with another head of income. Firstly the set off of losses is to be done by intra head adjustments. Then remaining losses will be set off inter head. Losses incurred from house property can be set off against income from salary. However, Speculative Business loss, Specified business loss, Capital Losses, and Losses from owning and maintaining racehorses cannot be set off against any other head of profit and income.

Business loss other than speculative business can be set off against any head of income except income from salary.

Carry forward of loss:
Remaining losses after intra and inter head adjustments, are carried forward to subsequent years. The incomes in subsequent years can be reduced by these losses which are carried forward.

Following are instances where losses can be carried forward for certain periods:

• House Property losses:

If losses under house property remain unadjusted in the same financial year in which losses were incurred, they can be carried forward to the subsequent 8 financial years. Such losses can be adjusted only against income from house property and can be carried forward.

• Speculative Business Loss:

If losses under speculative business remain unadjusted in the same financial year in which losses were incurred, they can be carried forward to subsequent 4 assessment years. Carry forward is not allowed if ITR is not filed within due date.

• Infinite carry forward of specified business loss:

No time limit to carry forward the losses from the specified business under 35AD. Carry forward is not allowed if ITR is not filed within due date.

• Capital Gain Losses:

Capital losses can be carried forward to the subsequent 8 assessment years. It can only be carried forward if the ITR is filed on or before the due date.

• Losses from Owning and Maintaining Horse Races:

Such losses can be carry forward up to subsequent 4 assessment years from the assessment year in which the loss was incurred. Carry forward is not allowed if ITR is not filed within due date.

Conclusion:
Set off cand carry forward of losses is a tool by which assessees can reduce their tax liability by adjusting such losses against incomes of respective or subsequent financial years. However, there are certain limits only till which you can carry forward such losses. These limits depend on the type or head of income as mentioned in the income tax provisions.

About Author:
CA Chinmay Shirish Agate
Chinmay Agate is a Practicing Chartered Accountant having 4+ years of experience and expertise in the field of Direct Taxation and Auditing compliances. In the past, he worked in various CA firms and comes with wide industry experience from services, retail to manufacturing to trading where he has handled various complex assignments. He has keen interest in Forex and Derivative knowledge as well as fundamental analysis.