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 limitation 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.

Exceptions to Intra-head set off

• Losses from the speculative business can only be set off against the income from the speculative business. And cannot be set off against income from any other businesses.
• Losses from owning and maintaining horse races can be set off against income from owning and maintaining horse races.
• Long-term capital losses can only be set off against long-term capital gains.
• Short-term capital losses can be set off against long-term and short-term capital gains.
• Losses from the specified business can only be set off against profit from the specified business. However, losses from other professions and businesses can be set off against profit and income from specified businesses.
• Loss from the exempted source of income cannot be adjusted against taxable income, E.g., Agricultural income is exempt from tax; hence, if the taxpayer incurs a loss from agricultural activity, then such loss cannot be adjusted against any other taxable income

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.

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.

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 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)}.

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.

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.
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