Setting off and carrying forward of losses

Setting off and carrying forward of losses

According to the Income Tax Act, a person can opt for ‘setting off and carrying forward of losses’ for the losses that have been incurred. This provides some relief to the person who has incurred the losses.

Setting off of losses

Set off of losses means adjusting the losses against the profit of a particular financial year. If the profits are insufficient to set off the losses, they can be carried forward to the next assessment year.

Following are the ways in which the losses can be set off:

InterSource Adjustments (Section 70)

In this adjustment, an assessee has the option to set off the losses of one source of the profit of any other source under the same head. This adjustment is not possible in the following cases:

  1. Long-term capital losses- Long-term capital losses can be set off only against the long-term capital gains but the short-term capital losses can be set off against both the short-term as well as long-term capital gains.
  2. Speculative business losses- Losses of speculative businesses can be set off only against the profits of speculative businesses; it is not possible to set off the speculative business loss against any other business/professional income. However, any other business loss can be set off against the profits of speculative businesses.
  3. Loss from owning and maintaining race horses- Like speculative business loss, loss from owning and maintaining race horses can also be set off only against the profit from owning and maintaining race horses.
  4. Specified Business Loss under Section 35AD- Losses from specified businesses can be set off only against profits from such specified businesses only but the losses from other businesses can be set off against profits from specified businesses.

 Inter head Adjustments

This is another way of setting off of losses. If it is not possible for an assessee to set off the losses under Intercourse adjustment, he/she can use this adjustment to set off the losses. Under this adjustment, an assessee has the option of setting off the losses of one head against the profits of another head in a particular financial year. The adjustments under this category are:

  1. House Property Losses- Losses from House Property can be set off against profits from other heads like: salary income, business income, income from capital gains, and income from other sources.
  2. Non-Speculative Losses- Non-speculative business losses can be set off against any other heads like: business income, income from house property, etc except income from salary.

NOTE: Losses which can be set off from intercourse adjustments cannot be set off from inter-head adjustments.

Carrying forward of losses

If an assessee cannot set off losses in the intercourse and inter-head adjustments, then he/she can carry forward the losses to the next assessment year. It should be clearly understood that the carry forward losses can be set off only against the profit from that head of income. An assessee has to file Income Tax Return on due dates to carry forward the losses to next assessment years except the losses arising out of house property.

Following are the categories in which the losses can be carried forward:

  1. House Property Losses- House property losses can be carried forward up to 8 years from the financial year in which the loss has been incurred. It can be adjusted only against income from house property. An assessee can file the income tax return in this case later on.
  2. Non-Speculative Business Losses- Non-speculative business losses can be carried forward up to 8 years from the financial year in which the loss has been incurred. This loss can be set off only against the business income. To carry forward the losses under this category, an assessee has to file the income tax return on due date.
  3. Speculative Business Losses- The speculative business losses can be carried forward up to any number of years. For losses to be carried forward to next years, an assessee is required to file the income tax return on due date. This loss can only be adjusted against specified business incomes.
  4. Long-term/Short-term losses- Long-term/short-term losses can be carried forward up to 8 years from the financial year in which the loss has been incurred. Loss-term capital losses can be adjusted only against the long-term capital gains but the short-term capital losses can be adjusted against both the short-term as well long-term capital gains. For carrying forward this loss to next assessment years, an assessee must file the income tax returns on the due date.
  5. Loss from owning and maintaining race horses- Loss from owning and maintaining race horses can be carried forward up to 4 years from the financial year in which the loss has been incurred. An assessee has to file the income tax return on time to carry forward the losses to next years. This loss can only be adjusted against the income from owning and maintaining race horses.

Simple and easy procedure to file income tax return online through ITR Software by Taxraahi.

Related Post: Self Assessment Tax: Computation and Payment

By | 2018-08-08T08:02:42+00:00 July 13th, 2016|Categories: Income from house property, Income Tax Guide|0 Comments

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