What is Carrying Forward and Setting Off of Losses under Income Tax Act?

In finance, profit and loss always play a part in an individual’s life. Every time you won’t achieve the profits. Sometimes you may incur losses too. Section 70 and 71 of the Income Tax Act, 1961 deals with setting off of losses.

Income tax rules in India give a benefit for the taxpayers who suffer losses. The law has specific provisions to set off and carry forward of losses. Let’s discuss what is carrying forward and setting off of losses in the context of Indian IT rules.

Setting off of Losses

Setting off of losses means adjusting the losses against that particular year’s profit or revenue from some different head. Losses not compensated against income in the same year may be carried forward to the following years for set-off against income of those years. One can divide the setting off of losses into two categories.

• Inter-Source Set-off ( Section 70)
• Inter-Head Set-off ( Section 71)

Inter-Source Set-off

In the inter source set-off, losses from one revenue source are balanced against profits from another source under the same income head. The provision gets covered under section 70 of the IT Act. However, there are certain exceptions such as-

Exceptions

• Losses from a Speculative business will only be balanced against speculative business profit. One can’t adjust the uncertain business losses with the income from any other business or career.
• Loss from a race-horses owning and maintaining operation will balance against the income from a race-horses owning and maintaining activity.
• A long-term capital loss is applied to long-term capital gains only. However, both long-term capital gains and short-term capital gains can be offset against a short-term capital loss.
• Losses from a specified business will only be offset against the profit of the specified companies. However, the losses of any other business or profession may be offset against the profits of the specified companies.

Inter-Head Set-off

The taxpayers can set off remaining losses against revenue from other heads after the inter source set-off adjustments. For example, loss from house property can be balanced against salary income.

Here are a few more instances of inter-head set-off of losses.

• Losses from house property can be balanced against income under any heading.
• Business loss other than risky business can be compensated against any profit head except salary revenue.

Also, one should note that the resulting losses can not be offset against any other head of revenue:

• Loss from speculative business
• Loss of capital.
• Loss from the specific business.
• Losses from horse race owning and keeping activity.

Carry Forward of Losses

There could still be unadjusted losses after making the necessary and permissible inter-source and inter-head changes. Such unadjusted losses for profit changes of these years can be carried forward to future years.

For different heads of income, the rules regarding carrying forward vary a bit. Depending upon the type of loss which needs to be carried forward, sections 71 B, 72, 73, 73 A, 74 and 74 A of the IT act deals with the carrying forward of losses. Let’s understand the gist of them.

Losses from House Property

• It is carried forward to the next eight years from the assessment year in which the loss occurred.
• It is adjusted only against income from house property.
• It can be carried forward if the revenue return for the return is filed late.

Non Speculative Loss of Business

• It is carried forward to the next eight years from the year of assessment in which the loss occurred.
• It is adjusted against the income from speculative business.
• It is not necessary to continue the business when setting off in the future years.
• Losses can’t be carried forward if the income tax return is not filed within the due date.

Losses from Speculative Business

• It can be carried forward from the assessment year in which the loss was incurred up to the next four years.
• It can only be balanced against speculative business income.
• It cannot be forwarded when the return is not filed within the original due date.
• It is not necessary at the time of setting off in future years to continue the business.

Specific Business Loss under 35 AD

• No time limit for carrying forward the losses of the business specified under 35AD.
• It is not needed at the time of setting off in future years to continue the company.
• It can not be carried forward if the return is not filed within the original due date.
• It can only be adjusted against income under 35AD from a specific business.

Losses of Capital

• It can be carried forward from the evaluation year in which the loss was incurred to the next eight assessment years.
• Long-term capital losses can only be balanced to sustained capital gains.
• Long-term capital losses, as well as short-term capital gains, can be offset against long-term capital gains.
• It can not be forwarded when the return is not filed within the original due date.

Losses from a Race-horses Owning and Keeping Activity

• One can’t carry forward the loss to the next four evaluation years from the assessment year in which the loss was incurred.

• If a return is not filed within the original due date, it can not be carried forward.
• The setting off is possible against only the income from the possession and maintenance of race-horses.

Bottom Line

Taxpayers must take care of this essential information if they incurred a loss from a source from which income is otherwise tax exempted, they cannot compensate such losses against any taxable source of income.

Also, losses can not be balanced against casual profits, crossword puzzles, lottery winning, races, card games and betting.