Set Off and Carry Forward Losses

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.
    
• 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:

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.

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:
  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 2022-23 (AY 2023-24)
  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 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.

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