Set Off and Carry Forward Losses under the Income Tax Act

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Sakshi Shah

Business and Profession Income
Capital Gains
Income from House Property
Income Source

Set-Off Losses under Income Tax means adjusting the loss against the taxable income earned; after that, the amount of loss remaining can be carried forward to future years. Therefore, the carry forward losses can be set off against future incomes. The Income Tax Act has, however, specified rules to set off and carry forward losses under each head of income. The taxpayer cannot carry forward losses to future years if the income tax return for the year in which loss is incurred is not filed on the Income Tax Website within the due date as per Sec 139(1). However, loss under the head House Property can be carried forward even if the return is filed after the due date.

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Set Off Losses

  1. Intra-head Set Off – Loss from one source of income can be set off against income from another source of income under the same head of Income. Eg: Loss from business income can be adjusted against profit from presumptive income.
  2. Inter-head Set Off – Loss from one head of income can be set off against income from another head of income. Eg: Loss from business income can be adjusted against income from house property.

Loss under any head of income should be first set off against the income under the same head i.e. Intra-head set off. And then only can be use against other heads of income i.e. Inter-head set off. Below is a table with rules for set off.

Rules to Set Off Loss in Current Year

Income Tax Rules Set Off Loss

For Example

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

Solution

Non-Speculative Business Loss should be set off in the following order:

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


Carry Forward Loss

Once the taxpayer adjusts losses using intra-head set off and inter-head set off rules, then the taxpayer can carry forward the remaining losses to future years. The carry forward loss can be adjusted against future incomes. Therefore, any Loss under any head of income except House Property Loss cannot be carried forward to future years if the ITR has not been filed within the due date as per Sec 139(1). Below is the table with rules to carry forward loss and set off against future incomes.

Rules to Carry Forward Loss & Set Off against income in Future Years

Nature of Loss No. of Years Set off in Future against
House Property Loss 8 Years House Property Income
Speculative Business Loss 4 Years Speculative Business Income
Non-Speculative Business Loss 8 Years Non-Speculative Business Income or Speculative Business Income
LTCL 8 Years LTCG
STCL 8 Years STCG / LTCG
Horse Race Loss 4 Years Race Horse Income
Specified Business Loss u/s 35AD Indefinite Period Specified Business Income u/s 35AD
Other Sources Loss cannot be carried forward Not Applicable

 

Income Tax on Trading
Read about income tax for Investors and Traders. Learn to about trading turnover, tax audit, tax rates, ITR Form, Due Date, set-off & carry forward loss, advance tax, etc
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Income Tax on Trading
Read about income tax for Investors and Traders. Learn to about trading turnover, tax audit, tax rates, ITR Form, Due Date, set-off & carry forward loss, advance tax, etc
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For Example

Solution

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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.

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