Set Off and Carry Forward of Losses under Income Tax Act

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

• Business (PGBP) Loss
  • You can set off Non-Speculative Business Loss against any income except salary income.
  • However, you cannot set off Speculative Business Loss against any income other than Speculative Business Profit.
• Loss under Capital Gains
  • You cannot set off loss under the head “Capital Gains” against income under other heads of income.
  • You cannot set off LTCL i.e. long-term capital loss against any income other than LTCG i.e. long-term capital gain.
  • Further, you cannot set off STCL i.e. short-term capital loss against any income other than STCG i.e. short-term capital gain, and LTCG i.e. long-term capital gain.
• House Property Loss
  • You can set off loss under the head ‘House Property’ against any income. There is no restriction to set off house property loss.
  • From AY 2018-19, you can set off loss under the head ‘house property’ against any other income head to the extent of Rs. 2,00,000 only for any assessment year. However, you can carry forward unabsorbed loss for set-off in subsequent years as per provisions of Section 71B.
• Loss from trading in Cryptocurrency and other Virtual Digital Assets (VDA)
  • You cannot set off loss from the transfer of cryptocurrency, NFT or VDA against any other income.
  • Further, you cannot set off loss under any other head of income against profit on transfer of cryptocurrency, NFT or VDA.
• Horse-Race Loss
  • You cannot set off loss from the business of owning and maintaining race horses against any income other than income from the business of owning and maintaining race horses.
• Specified Business Loss
  • You cannot set off loss from business specified under section 35AD against any other income except for income from specified business. Section 35AD is applicable for specified businesses like cold chain facility, warehousing facility for storage of agricultural produce, developing and building housing projects, etc.
• You cannot set off loss against income from winnings from lotteries, crossword puzzles, horse race, card games, and games having gambling or betting.

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.

Example for Carry Forward of Loss

• FY 2020-21 (AY 2021-22)
  Non-Speculative Business Loss: INR 5,00,000
  Speculative Business Income: INR 1,00,000
  House Property Income: INR 2,50,000
  
• FY 2021-22 (AY 2022-23)
  Speculative Business Income: INR 30,000
  Non-Speculative Business Income: INR 1,40,000

Solution

• FY 2020-21 (AY 2021-22)
  The 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)
     
• FY 2021-22 (AY 2022-23)
  The taxpayer can set off Non-Speculative Business Loss in the following order:
  1. Carry Forward Loss – INR 1,50,000
  2. Non-Speculative Business Income – INR 1,40,000
  3. Speculative Business Income – INR 10,000

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.

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