Set Off and Carry Forward of Losses under Income Tax Act

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Sakshi Shah

Business and Profession Income
Capital Gains
Income from House Property
Income Source
Last updated on April 5th, 2023

The Income Tax Act has laid down provisions for set off and carry forward of losses. Set off of loss means adjusting the loss against the taxable income. The taxpayer can carry forward the remaining loss to future years to set off against future incomes. The Income Tax Act prescribes rules to set off and carry forward of losses under each head of income. Further, if the taxpayers have not filed the ITR within the due date as per Sec 139(1), they cannot carry forward losses to future years. However, taxpayers can carry forward the loss under the head Income from House Property to future years even if they file the ITR after the due date.

Set Off Losses

Intra-Head Set Off of Loss

Intra-Head set off is the adjustment of loss from an income source against the profit from another income source under the same head. For example, set off of loss from self-occupied property against profit from another rented house property is an intra-head set-off.

Inter-Head Set Off of Loss

Inter-Head set off is the adjustment of loss under an income head against the profit under another income head. For example, set off of loss from self-occupied house property against income from salary. Before making the inter-head set-off, the taxpayer has to first make the intra-head set-off.

Restrictions for making Adjustment of Loss (Set Off) in Current Financial Year

Example for Set Off Loss

Non-Speculative Business Loss: INR 5,00,000
Speculative Business Income: INR 1,00,000
House Property Income: INR 2,50,000

Solution

Taxpayer can set off Non-Speculative Business Loss in the following order:

  1. Speculative Business Income (Intra-head set off) – INR 1,00,000
  2. House Property Income (Inter-head set off) – INR 2,50,000
  3. Carry Forward Loss to future years – INR 1,50,000 (5,00,000 – 1,00,000 – 2,50,000)

Carry Forward of Loss

Loss remaining after set off is the loss that taxpayer can carry forward to future years to set off against future incomes. For example, loss from self-occupied house property remaining after intra-head and inter-head set off, the taxpayer can carry forward for 8 years and adjust against future income from house property.

It is important that the taxpayer files the Original ITR within the due date as per Section 139(1) to carry forward the loss to future years. However, it is possible to carry forward loss under the head House Property to future years even if the taxpayer files a Belated ITR under Section 139(4). Below is the table with rules for carry forward and set off of losses against future incomes.

Rules to Carry Forward Losses and Set off Losses Against Income in Future Years

Example for Carry Forward of Loss

Solution

Carry Forward and Set Off of Non-Speculative Business Loss

The taxpayer can carry forward Non-Speculative Business Loss that remains after set off for 8 assessment years. The taxpayer can only carry forward loss if they have filed ITR before the due date u/s 139(1). In the coming financial years, the taxpayer can set off the brought forward Non-Speculative Loss against profits from both non-speculative and speculative business. Further, the taxpayer can set off a specified business loss under Section 35AD against profits from specified business under Section 35AD only.

The taxpayer can carry forward Speculative Business Loss that remains after set off for 4 assessment years. The taxpayer can only carry forward their loss if they have filed their income tax return before the due date of filing the ITR u/s 139(1). In the coming financial years, the taxpayer can set off the brought forward Speculative Business Loss against profits from speculative business only.

The taxpayer can carry forward loss from the business of owning and maintaining racehorses for 4 assessment years. In the coming years, the taxpayer cannot set off such loss against any income other than income from the business of owning and maintaining race horses.

Carry Forward and Set Off of House Property Loss

The taxpayer can carry forward and set off losses from House Property for 8 assessment years. The taxpayer can carry forward their loss even if they have filed ITR after the due date of u/s 139(1). In the coming financial years, the taxpayer can set off the brought forward House Property Loss against income from House Property.

Carry Forward and Set Off of Capital Loss

The taxpayer can carry forward loss under the head ‘Capital Gains’ that remains after set off for 8 assessment years. The taxpayer can only carry forward their loss if they have filed ITR before the due date of u/s 139(1). In the coming financial years, the taxpayer can set off the brought forward STCL (Short Term Capital Loss) against both STCG (Short Term Capital Gain) and LTCG (Long Term Capital Gains). Further, the taxpayer can set off the brought forward LTCL against LTCG only.

Carry Forward and Set Off of Crypto Loss

Budget 2022 brought changes to the tax on cryptocurrency, NFT, and other virtual digital assets (VDA). As per the budget provisions, here is the treatment of loss on the sale of cryptocurrency, NFT, and other VDA.

The taxpayer cannot set off the loss from the transfer of one VDA against profit from the transfer of another VDA or any other income. Further, the taxpayer cannot carry forward such loss to future years. If there is a loss under any other head of income, the taxpayer cannot set it off against profit on the transfer of VDA.

Treatment of Loss as per New Tax Regime

With the introduction of Section 115BAC in Budget 2020, there were few changes in the treatment of losses as follows:

  1. House Property Loss
    As per the new income tax regime, the taxpayer can set off only current year loss from house property against income from house property and not against any other Income. Moreover, the taxpayer cannot carry forward house property loss to future years if he/she opts for the new tax regime.
  2. Set Off Business/Profession Loss
    In the case of a business income, an individual/ HUF cannot set off the brought forward business loss or unabsorbed depreciation. Further, they cannot carry forward these B&P losses and unabsorbed depreciation if they relate to deductions/exemptions withdrawn under clause (i) of sub-section (2) of section 115BAC.

    In simple terms, you can carry forward short-term & long-term capital losses, derivatives trading losses in the new tax regime. Since, only the losses relating to deductions & exemptions withdrawn under Section 115BAC(2)(i) cannot be set off or carried forward, for eg: House property losses, additional depreciation, etc.

    The image below gives a clear understanding of the treatment of losses in the new and old tax regime.
Treatment of Loss in Old and New Tax Regime

FAQs

I have incurred losses under equity intraday trading. Can I adjust it against F&O trading income?

Loss from equity intraday trading is a speculative business loss. Speculative loss can be set off against Speculative Profits only. Thus, it cannot be adjusted against F&O trading income. However, you can carry forward the loss for 4 years and adjust it against speculative profits in future.

I have incurred losses of Rs. 10 lacs from F&O trading. I also have an Interest Income of Rs. 2 lacs and Salary Income of Rs. 6 lacs. Can I adjust F&O trading loss with salary income and interest income?

Loss from F&O trading is a non-speculative business loss. Non-Speculative Loss can be set off against any income except Salary Income in the current year. Thus, you can adjust non-speculative loss against interest income (2 lacs) but not salary income. However, you can carry forward the remaining loss (8 lacs) for 8 years and adjust it against business & profession income (speculative and non-speculative) in future.

I have not filed Income Tax Return before the due date of filing the return. Can I file the ITR to carry forward loss to future years?

You cannot carry forward loss to future years if the income tax return for the year in which loss is incurred is not filed within the due date as per Sec 139(1). However, if you have incurred loss under head house property, you can carry forward the loss even if the return is filed after the due date.

Got Questions? Ask Away!

  1. Hi Team, Greetings
    A quick question. Would appreciate your review & advise.

    For the Current financial year, I have profits in Short & long term Capital Gains. On the other hand I have losses in both, Intraday (speculative) and F&O trading.

    (1) Can I offset my short & Long term capital gains, against any of these losses.

    (2) Additionally, any additional income that I may have from Interest or Dividend, Can I offset these also from the given losses

    Would appreciate an early response (excuse the urgency).

    Many Thanks
    Best Regards

  2. Hi @Tony_Almeida

    As per the law, STCL can be adjusted against STCG & LTCG and LTCL can be adjusted only against LTCG.
    FnO trading is considered non-speculative business income & intraday is considered speculative business income.
    You can set off losses of only FnO losses against the capital gains as it is a non-speculative income. Speculative losses can be set off only against speculative income.

    1. You can also set off losses from the “Income from Other Sources” head.

    Refer to Set Off and Carry Forward of Losses under Income Tax - Learn by Quicko for more information.
    Hope this helps.

  3. Hi @Tony_Almeida

    You can set off FnO losses against capital gains (both STCG & LTCG) in the same year only, ie, the loss and profit of the same year. Meaning, you cannot set off FnO losses if it is carried forward against capital gains income. It can then be set off only against the business income.

    Hope this helps.

  4. After importing from Zerodha, the STCG (loss) is automatically set-off against LTCG (profit) although LTCG (profit) is exempted since it < Rs 1 lakhs. Therefore, STCG (loss) should not be offset against it, rather it could be carry forwarded. How to alter in Quicko?

  5. Hi @SAAD625

    As per the Income Tax Act, losses are set off first and then the remaining are carried forward.
    The 1 lakh LTCG exemption is applicable on taxable capital gains and taxable long-term capital gain is arrived after setting off of losses

    Hope this clarifies.

  6. Hi Ms. Shrutika,

    Just to be sure I understand what you’re saying.

    Let’s say last FY was the first year I sold shares and had a loss of ₹60,000. Lets also say I have other income which is more than the 0% income slab for my age each year, so I can normally (if no CFL available) only exempt ₹1L long term capital gains each year.

    This FY I sell shares and and have realized a gain of ₹40,000. If I don’t sell any more shares, what you’re saying is the IncomeTax act requires the ₹40,000 to first be offset against the carry forward loss of ₹60,000 to give a LTCG income of 0. Therefore, only ₹20,000 is left to carry forward after this FY and the ₹1L exemption is not used in any way? In other words I would have lost ₹40,000 of my carry forward loss without saving a paisa on my taxes? So, in a case like this if I want to “get the full benefit” of the ₹60,000 CFL I should have long term capital gains of at least ₹1,60,000?

    Thanks & regards,

    Russell

  7. Avatar for Noob Noob says:

    Suppose I have short term capital losses from foreign shares of 10 lakhs. I also have long term capital gains from Indian shares of 10 lakhs.

    Do I have the option of carrying forward the ST loss from foreign shares so that I can set if off against short term capital gains in foreign shares in future years or must I necessarily first set off the ST capital loss against the LT capital gains in the current year before I am allowed to carry the loss forward?

  8. Hi @Noob

    When it comes to setting off capital losses and gains, the general rule is to set off short-term capital losses (STCL) against any capital gains, regardless of foreign or Indian shares, before carrying forward the remaining losses. In your case, you have a short-term capital loss (STCL) of ₹10 lakhs from foreign shares and long-term capital gains (LTCG) of ₹10 lakhs from Indian shares.

    Therefore, you must first set off the STCL of ₹10 lakhs against the LTCG of ₹10 lakhs in the current year. After setting off the loss against the gains, if any loss remains, you may carry forward it to future years.

  9. Hi @Shrutika_Shah or @Muskan_Balar,

    Would one of you be kind enough to validate what I have said in my post #9 (3 messages above this one), please?

    Thanks,

    Russell

  10. Hi @Russell

    As per the law, LTCG up to ₹1 lakh is not taxable every year.

    Assuming ₹60,000 to be LTCL and 40,000 to be STCG, then the set-off cannot happen as LTCL can only be set off against LTCG.

    As per the law, your current year’s losses will be set off first, and then the brought forward losses.

    Yes, in order to “get the full benefit” of ₹60,000 LTCL you will have to have a LTCG of ₹1,60,000.

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