Set Off and Carry Forward of Losses under Income Tax Act

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 of losses can be set off against future incomes. The Income Tax Act has, however, specified rules to set off and carry forward of 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 Income from House Property can be carried forward even if the return is filed after the due date.

Set Off Losses

Intra-Head Set Off

A taxpayer who has incurred losses during any year from a particular income head is allowed to adjust such losses against income from any other source falling under the same income head. Hence, the adjusting of loss from a source under a particular income head against income from any other source under the same income head is called Intra Head adjustment.

Restrictions to keep in mind while making Inter Head Adjustment of Loss

• Loss from speculative business cannot be set off against any income other than
  income from speculative business. However, non-speculative business loss can be
  set off against income from speculative business.
• Long-term capital loss cannot be set off against any income other than income
  from long-term capital gain. However, short-term capital loss can be set off
  against long-term or short-term capital gain.
• No loss can be set off against income from winnings from lotteries, crossword
  puzzles, race including horse race, card game, and any other game of any sort or
  from gambling or betting of any form or nature.
• Loss from the business of owning and maintaining race horses cannot be set off
  against any income other than income from the business of owning and
  maintaining race horses.
• Loss from business specified under section 35AD cannot be set off against any
  other income except income from specified business (section 35AD is applicable
  in respect of certain specified businesses like setting up a cold chain facility,
  setting up and operating warehousing facility for storage of agricultural produce,
  developing and building a housing projects, etc.).

Inter-Head Set Off

Inter Head adjustments are made post Intra Head adjustments. If a taxpayer has incurred loss in any year under one head of income and is also having income from another income head, then he/she can adjust the loss from one income head against the other income head. This is called Inter Head adjustment.

Restrictions to be kept in mind while making Inter Head Adjustment of Loss

• Before making inter-head adjustment, the taxpayer has to first make intra-head
  adjustment.
• Loss from speculative business cannot be set off against any other income.
  However, non-speculative business loss can be set off against income from
  speculative business.
• Loss under head “Capital gains” cannot be set off against income under other
  heads of income.
• No loss can be set off against income from winnings from lotteries, crossword
  puzzles, race including horse race, card game, and any other game of any sort or
  from gambling or betting of any form or nature.
• Loss from the business of owning and maintaining race horses cannot be set off
  against any other income.
• Loss from business specified under section 35AD cannot be set off against any
  other income (section 35AD is applicable in respect of certain specified
  businesses like setting up a cold chain facility, setting up and operating
  warehousing facility for storage of agricultural produce, developing and building
  housing projects, etc.)
• Loss from business and profession cannot be set off against income chargeable to
  tax under the head “Salaries”.
• With effect from the assessment year 2018-19, loss under the head “house
  property” shall be allowed to be set-off against any other head of income only to
  the extent of Rs. 2,00,000 for any assessment year.
• However, unabsorbed loss shall be allowed to be carried forward for set-off in
  subsequent years as per the existing provisions of section 71B. (Provisions
  relating to carry forward of loss from house property is discussed later.)

For Example

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

Solution

Non-Speculative Business Loss should be set off 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)
   
   

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Carry Forward of 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.

For Example

• FY 2018-19 (AY 2019-20)
  Non-Speculative Business Loss: INR 5,00,000
  Speculative Business Income: INR 1,00,000
  House Property Income: INR 2,50,000
  
• FY 2019-20 (AY 2020-21)
  Speculative Business Income: INR 30,000
  Non-Speculative Business Income: INR 1,40,000

Solution

• FY 2018-19 (AY 2019-20)
  Non-Speculative Business Loss should be set off 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 2019-20 (AY 2020-21)
  Non-Speculative Business Loss should be set off 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 Business Loss other than Loss from Speculative Business

If loss of any business or profession, apart from that of speculative business cannot be adjusted in the year in which it is incurred, then the adjustment loss can be carried forward for making adjustment in the next year. However, such loss can only be adjusted against income charged to tax under the income from business and profession.

Taxpayer can only carry forward their loss if they have filed their return before the due date of filing the ITR u/s 139(1). Losses in this case can be carried forward for 8 years. Loss from business specified under section 35AD cannot be set off against any other
income except income from specified business.

Loss from the business of owning and maintaining race horses cannot be set off against
any income other than income from the business of owning and maintaining race horses.
Such loss can be carried forward only for a period of 4 years.

Carry Forward and Set Off of House Property Loss

Taxpayers can carry forward loss incurred under the head income from house property if they are unable to adjust these losses in the current year. Losses from this income head can only be adjusted against income from the same head, or, income from house property. These losses can be carried forward for 8 years.

Carry Forward and Set Off of Capital Loss

Losses from the income head – capital gains can only be adjusted against the income head capital gains. However, long term capital loss can be adjusted only against long term capital gains, yet, short term capital loss can be adjusted against long term capital gains as well as short term capital gains. These losses can be carried forward for 8 years.

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, only current year losses from house property can be set off against income from house property and not against any other Income.
   
   Moreover, losses from income from house property cannot be carried forward in the new income tax regime.
   
2. Setting-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 and 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 clause (i) of sub-section (2) of section 115BAC 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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