Set Off and Carry Forward Losses

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Sakshi Shah

Business and Profession Income
Capital Gains
Income from House Property
Income Source
Last updated on January 31st, 2024

When a person or a business faces financial losses, they can use these losses to reduce the amount of taxes they have to pay. This is called “setting off and carrying forward losses”. Essentially, it’s like making the best out of a bad situation. This strategy can be a smart move to deal with tough financial situations and is an important aspect of calculating income taxes.

Basics of Carry forward and Set off of losses

The taxpayer can adjust losses against the income of the current year, and if there are any remaining losses, they can carry them forward to future years for adjustment against the income of those respective years.

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, they can carry forward the loss under the head Income from House Property to future years even if they file the belated ITR.

Set Off Losses

Intra-Head Set Off of Loss

Intra-head set-off means adjusting losses against income within the same head. Therefore, losses from a specific source within one head can be adjusted against income from another source in the same head. For example, if there is a loss from a self-occupied property and profit from another rented house property, you can adjust the losses against the income.

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. Hence, when the taxpayer has incurred losses in one income head but has positive incomes in another income head, those losses can be adjusted against this income. 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.

Methodology of set-off of losses for each head

rules of set off losses


Example of 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

Taxpayers 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 Losses

Loss remaining after set off is the loss that taxpayers 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.

The taxpayer must file 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 carrying forward and setting 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 Business Loss

Non-speculative business loss

The taxpayer can carry forward Non-Speculative Business Loss that remains after set off for 8 assessment years. Moreover, It can be set off against the incomes under the head ‘Profits and Gains from Business and Profession.’

Speculative business loss

The losses from speculative business can be carried forward for 4 years. However such brought-forward losses can be adjusted against speculative business incomes only.

Specified business loss

There is no restriction on time limit for carrying forward the losses from specified business. Further, these brought-forward losses can be adjusted against the specified business incomes only.

Owing and maintaining racehorses

The taxpayer can carry forward losses from this business for 4 years. However, they can adjust these losses only against the profits earned from owning and maintaining the racehorses.

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. Additionally, such carry forward of losses is also allowed if the ITR is filed after the due date of u/s 139(1).

In the coming financial years, these brought forward House Property Loss can set off 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. Further, they 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). However, 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, 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 a 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 they opt for the new tax regime.
  2. Set Off Business and 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.

    Hence, in the new tax regime, carry forward short-term and long-term capital losses and derivatives trading losses. However, losses like house property losses and additional depreciation, which are withdrawn under Section 115BAC(2)(i), cannot be set off or carried forward.

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

FAQs

Can I adjust the loss from equity intraday trading against F&O trading profits?

Loss from equity intraday trading is a speculative business loss. And, speculative loss can be set off against Speculative Profits only. Thus, it cannot be set off against F&O trading income.

If I do not file ITR within due date, still can I carry forward losses by filing a belated return?

Failing to file the income tax return by the due date u/s 139(1) prohibits carrying forward losses. Yet, for house property losses, there’s an exception – you can carry them forward even if filing occurs after the due date.

Can we carry forward losses without setting them off against current-year incomes?

No, the losses need to be set off against current year income and then the remaining losses can be carried forward to future years.

Is it possible to adjust losses from a specific source against any other income if the income from that source is exempt?

If income from a specific source is tax-exempt, the taxpayer cannot set off losses from that source against any other taxable income. For instance, Agricultural income is tax-exempt, so if a taxpayer experiences a loss from agricultural activity, they cannot offset that loss against any other taxable income.

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 Shrutika, Greetings again
    Firstly, Thank you so very much for this prompt response .Was awaiting to pay taxes, if any basis your response.

    Please excuse my lack of knowledge on the subject, hence a re-clarification:
    I got the (2) point clearly, that I can set off F&O losses against Income from other sources.

    However, on the STCG & LTCG, let me re-check if you meant that I can set off my F&O losses against both STCG & LTCG that I have.

    Request a re-affirmation to the above

    Appreciate

    Regards

  4. Team, Greetings again
    Please help Re-validate

    Thanks n Regards

  5. 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.

  6. 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?

  7. 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.

  8. 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

  9. 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?

  10. 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.

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