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
- Business (PGBP) Loss
- The Non-Speculative Business Loss can set off against any income except salary income.
- However, the Speculative Business Loss can be adjusted against only Speculative Business Profit.
- Loss under Capital Gains
- Short-term capital loss can be adjusted against short-term and long-term capital gains.
- Long-term capital losses can be adjusted against long-term capital gains only.
- The losses incurred under capital gains can only be set off against capital gains and not with any other income.
- House Property Loss
- The loss from house property can be set off against any other income.
- However, the set off of losses can be done up to INR 2,00,000 for a particular assessment year.
- Loss from trading in Cryptocurrency and other Virtual Digital Assets (VDA)
- The losses from the transfer of cryptocurrency, NFT, or VDA can not be set off against any other income.
- Also, the losses from other heads can be set off against profit on the transfer of cryptocurrency, NFT, or VDA.
- Horse-Race Loss
- The losses from the business of owning and maintaining racehorses can not be set off against any income other than income from the business of owning and maintaining racehorses.
- The losses from the business of owning and maintaining racehorses can not be set off against any income other than income from the business of owning and maintaining racehorses.
- Specified Business Loss
- Losses from businesses specified under section 35AD (like cold chain facilities, warehousing facilities for storage of agricultural produce, developing and building housing projects, etc.) can be adjusted against income from specified businesses only.
- However, the losses from other businesses and professions can be set off against specified business losses.
- Loss from Gambling or betting
- The losses from winnings from lotteries, crossword puzzles, horse races, card games, and games having gambling or betting can not be set off against any income.
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:
- Speculative Business Income (Intra-head set off) – INR 1,00,000
- House Property Income (Inter-head set off) – INR 2,50,000
- 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.
Example for Carry Forward of Loss
- FY 2021-22 (AY 2022-23)
Non-Speculative Business Loss: INR 5,00,000
Speculative Business Income: INR 1,00,000
House Property Income: INR 2,50,000 - FY 2022-23 (AY 2023-24)
Speculative Business Income: INR 30,000
Non-Speculative Business Income: INR 1,40,000
Solution
- FY 2021-22 (AY 2022-23)
The taxpayer can set off Non-Speculative Business Loss in the following order:- Speculative Business Income (Intra-head set off) – INR 1,00,000
- House Property Income (Inter-head set off) – INR 2,50,000
- Carry Forward Loss to future years – INR 1,50,000 (5,00,000-1,00,000-2,50,000)
- FY 2022-23 (AY 2023-24)
The taxpayer can set off Non-Speculative Business Loss in the following order:- Carry Forward Loss – INR 1,50,000
- Non-Speculative Business Income – INR 1,40,000
- Speculative Business Income – INR 10,000
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:
- 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. - 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.
FAQs
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.
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.
No, the losses need to be set off against current year income and then the remaining losses can be carried forward to future years.
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.
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
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.
Refer to Set Off and Carry Forward of Losses under Income Tax - Learn by Quicko for more information.
Hope this helps.
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
Team, Greetings again
Please help Re-validate
Thanks n Regards
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.
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?
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.
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
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?
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.