Set-Off and Carry Forward of Losses

---

What is Set Off of Losses?

Set-off loss means deducting the losses against any other profits of the same financial year. In other words, reducing the taxable Income against such losses saves taxes. Even if losses are not set off against income or profits in the same year in which losses were incurred, they can be carried forward to the future assessment years (with some limitations and set off against income of subsequent years). A set-off could be an intra-head set-off or an inter-head set-off.

• Intra-head set off
• Inter-head set off

---

Intra-Head Set Off of Losses

Intra-Head Set Off of Loss allows taxpayers to set off losses from income from one source against income from another source under the same head of income. For example, if a taxpayer has a business loss from one source of income, they can set it off against the profit from another business source of income under the same head.

---

Inter-head Set off of Losses

After adjusting the Intra-head set-off losses, the remaining losses can be set off against income from another head within the same financial year. For example, losses incurred from house property can be set off against income from salary. However, Speculative Business loss, Specified business loss, Capital Losses, and Losses from owning and maintaining racehorses cannot be set off against any other head of profit and income.

It is important to note that, if you cannot set-off, or carry forward losses in your ITR, if your ITR is filed after the due date, except in the case of house property loss.

Given below are few restrictions for inter-head set off of losses:

---

What is Carry Forward of Losses?

After adjusting the Intra-head set-off and inter-head set-off against the income of the same financial year, there could still be some losses remaining, or there is not enough income or profit to adjust the losses in that particular financial year. Losses can be carried forward to the future assessment years and set off against the income of those years.

Have losses from the House property? You can still carry them forward to the next FY. Simply file a belated return to carry forward your house property loss. File Now!

Rules to carry forward losses:

• Losses under Income from house property
  If losses under house property are not fully adjusted in the same financial year in which losses were incurred, they can be carried forward to the next 8 assesment years. Such losses can be adjusted only against income from house property and can be carried forward even though ITR is filed after the due date {Section 139(1)}.
• Losses from Non-speculative Business
  If losses under business or profession (Non-speculative business) are not fully adjusted in the same financial year in which losses were incurred, they can be carried forward to the next 8 assessment years. Such losses can be adjusted only against income from business or profession and can only be carried forward if the ITR is filed on or before the due date as per {Section 139(1)}. It is not necessary that the business from which such loss is incurred should be in continuance to carry forward losses.
• Losses from speculative business
  If losses under speculative business are not fully adjusted in the same financial year in which losses were incurred, they can be carried forward to the next four assessment years. Such losses can be adjusted only against income from the speculative business and can only be carried forward if the ITR is filed on or before the due date {Section 139(1)}. It is not necessary that the business from which such loss is incurred should be in continuance to carry forward losses.
• Losses under specified Business (35AD)
  If losses under specified business are not fully adjusted in the financial year in which losses were incurred, they can be carried forward to infinite numbers of years. Such losses can be adjusted only against income from the specified business under 35AD and can only be carried forward if the ITR is filed on or before the due date {Section 139(1)}.
• Losses from capital gain
  
  • If not fully adjusted in the financial year in which losses were incurred, capital losses can be carried forward to the next 8 assessment years.
  • Long-term capital losses can only be adjusted against income from the LTCG. i.e., Long term capital gains.
  • Short-term capital losses can be adjusted against both LTCG and STCG, i.e., Long term capital gains and Short-term capital gains.
  • It can only be carried forward if the ITR is filed on or before the due date {Section 139(1)}.
• Losses from owning and maintaining racehorses
  Losses under racehorses can be carried forward for the next 4 financial years if not fully adjusted in the previous year in which losses were incurred. Such losses can be adjusted against income from owning and maintaining racehorses and can only be carried forward if the ITR is filed on or before the due date {Section 139(1)}.

Note:
Any taxpayer incurring a loss from a source, the income from which is generally exempt from tax, cannot set off these losses against profit from any taxable source of income.
Losses cannot be set off against casual income, i.e., crossword puzzles, winnings from lotteries, card games, races, betting ,etc.

Taxpayers must file their income tax returns within the prescribed due dates under the Income Tax Act to carry forward their losses. Failure to file on time results in the denial of the benefit of carrying forward certain losses.

---

Key Changes Introduced in ITR Forms for (AY) 2025–26

Given below the important changes that were introduced in ITR forms for AY 2025-26 -

Inclusion of Long-Term Capital Gains (LTCG) in ITR-1 and ITR-4
Previously, taxpayers with any LTCG were required to file more complex forms like ITR-2 or ITR-3. Now, individuals with LTCG up to ₹1.25 lakh from listed equity shares or equity mutual funds under Section 112A can file using the simpler ITR-1 (Sahaj) or ITR-4 (Sugam) forms, provided there are no carried forward losses.

Segregation of Capital Gains Based on Transaction Date
The updated ITR forms now require taxpayers to report capital gains separately for transactions executed before and after July 23, 2024. This change aligns with the revised capital gains tax rules introduced in the Union Budget 2024, which, among other things, reduced the LTCG tax on real estate to 12.5% without indexation from the previous 20% with indexation.

Reporting of Buyback Proceeds as Deemed Dividends
From October 1, 2024, proceeds received from the buyback of shares by domestic listed companies are to be treated as deemed dividends. The updated ITR forms require these proceeds to be reported under 'Income from Other Sources.' Additionally, the capital gains schedule should reflect zero sale proceeds, allowing the cost of acquisition to be claimed as a capital loss, which can be carried forward for up to eight assessment years.

Enhanced Capital Gains Reporting in ITR-7
For trusts, NGOs, and other institutions filing ITR-7, there is now a requirement to disclose capital gains separately for transactions before and after July 23, 2024. This change ensures accurate tax calculations in light of the revised capital gains tax rules.

Increased Threshold for Asset and Liability Reporting
In the ITR-2 form, the threshold for mandatory reporting of assets and liabilities has been raised to ₹1 crore. This adjustment aims to reduce the compliance burden for taxpayers with assets below this threshold.

---

Income Tax Return Filing

The income tax department mandates that losses for a given year cannot be carried forward unless the return for that year is filed before the due date. The due date to file the Income Tax Return (ITR) for individuals and businesses for the financial year ending March 31 is typically July 31 of the assessment year. For FY 2024-25, this deadline has been extended from 31st July to 15 September.

Even if your return reflects losses with no income to show, filing before the due date is essential. By doing so, you not only adhere to legal requirements but also preserve the option to carry forward those losses for future tax years. This proactive approach helps you maintain accurate financial records and potentially offset future taxable income, ultimately optimizing your tax position.

Remember, filing your return on time is not just about fulfilling an obligation; it's a strategic move to safeguard your financial interests and maximize opportunities for tax efficiency. So, whether you're reporting gains or losses, prioritize timely filing to stay on top of your tax obligations and pave the way for future financial success.

---

Can you Carry Forward Losses While Filing ITR Under the New Tax Regime?

The new tax regime is the default tax regime for ITR filing from FY2023-24. If an individual opts for the new tax regime, they can still avail the benefit of setting off and carrying forward capital losses, both from previous and current years. However, in the case of house property loss, it cannot be set off against any other head of income under the new tax regime. Additionally, such house property loss cannot be carried forward to subsequent years to offset against house property income or any other head of income.

Therefore, if an individual misses the last date to file an ITR, the belated ITR will be filed under the new tax regime. Compare the tax regime, and choose the right one cautiously.

---

Income Tax Act, 1961 vs Income Tax Act, 2025 provisions and changes

Find taxes complicated? Don’t worry! Simply get in touch with our tax experts, who can help you with everything related to taxes, right from tax planning to tax filing and notice assistance. Book an eCA now!

---