SET-OFF AND CARRY FORWARD OF LOSSES

The Act contains several provisions to provide relief to the assessees, through which they can claim several benefits to minimize their tax liability. To the common taxpayer, income tax is a crunch into the income earned. Accordingly, awareness of the relevant provisions pertaining to set off and carry forward of losses as provided under the Act is essential in order to maximize tax benefits.

Losses permitted to be carried forward and set-off

Note:

  • From FY 2017-18 onwards, if in any year, the assessee incurs a loss under the head ‘Income From House Property’, he shall be permitted to set off such loss only up to a maximum of INR 2,00,000.

  • The losses mentioned above may not be permitted to be carried forward if the return of loss for that year is not filed on or before the prescribed due date for filing returns. However, loss under the head “Income from House Property” can be carried forward even if the return has not been filed.

Point To Remember

  • In order to carry forward losses from heads other than “Income from House Property”, it is necessary to file Return of income within prescribed due date.

  • Both intra-head and inter-head set-off of losses is permitted in the same year.

  • Only intra-head set-off of losses is permitted for losses carried forward from previous years.

  • Loss under the head Income from Other Sources cannot be carried forward.

Frequently asked questions

What does set-off and carry forward of losses mean?


While one endeavors to derive income, the possibility of incurring losses cannot be ruled out. Based on the principles of natural justice, a set-off should be available for loss incurred. The income tax laws in India recognize this and provide for adjustment and utilization of the losses against the income earned. However, there are conditions which have been introduced to prevent misuse of such provisions.

Set-off means adjustments of losses against the profit from another source / head of income in the same FY.

If, in a particular FY, the amount of loss incurred is not fully set-off against the income due to inadequacy of income, such loss may be carried forward to the subsequent years and set-off against income under the same head of income subject to certain exceptions. The specific provisions regarding carry forward of losses are explained in the above table.




Can loss from one source (say House A) be adjusted against income from another source (say House B)?


If in any year, the taxpayer has incurred loss from any source under a particular head of income, then he is allowed to adjust such loss against income from any other source under the same head of income. This is known as inter-source or an intra-head adjustment. However, such set-off is subject to certain restrictions which have been summarized in the above table.

Exhibit 1: Where Loss of House A exceeds House B’s Income

Under the current Scenario the loss could be only set-offed to the extent of INR 30,000 rest 20,000 could be set-offed against the Income from other head if none then the same could be carried forward for next 8 years.

Exhibit 2: Where Loss of House A exceeds INR 200,000

Under the current Scenario the loss could be only set-offed to the extent of INR 200,000 rest 50,000 could be carried forward for next 8 years.




Can loss under one head of income (say Income From House Property) be set-off against income under any other head of income (say Income From Salary) ?


After making an intra-head adjustment, the assessee is then eligible to make an inter-head adjustment. If in any year, the taxpayer has incurred a loss under one head of income and has income under another head of income, then he can adjust the loss from one head of income against the other head. However, such set-off is subject to certain restrictions which have been summarized in the above table.




A NR sold an immovable property and there was a capital loss of INR 10 lakhs during FY 2016-17. Is it possible to carry forward such loss to the subsequent year in order to set off against the capital gains that may arise in future?


It shall be first necessary to ascertain the nature of the loss, i.e., whether it is short term capital loss or long term capital loss. Short term capital loss can be set-off against both long term and short term capital gains. Long term capital gains can be set off only against long term capital gains.

Now, if the loss incurred cannot be set-off entirely against the income earned in the same year, it may then be carried forward to the subsequent year provided Return of Loss has been filed within the prescribed time limit.




NRI has certain incomes/ losses for the FY 2019-20 (Details provided in answer). and intends to know thw taxable Income.


Taxable income for the FY 2019-20 will be INR 5,50,000. Loss from house property will be allowed to be set-off against other income.




NRI has incurred loss on share transactions, but has not filed his return within the due-date prescribed under the Act. Will she be allowed to carry forward such loss to the future years?


No, she will not be allowed to carry forward the loss to the future years, as she has not filed the return within the due date.




Will the answer to the above question differ in case she has incurred losses from house property for the relevant assessment year, but failed to file Return of Loss


Yes, if the loss is under the head ‘Income From House Property’, she will be allowed to carry it forward for the prescribed time period although the Return of Loss was not filed within the prescribed due date.




Can loss from any source exempt from tax be adjusted against any other taxable income or can the loss be carried forward to subsequent years?


If income from any source is exempt from tax, then loss from such source cannot be set-off against any other income which is chargeable to tax or cannot be carried forward to subsequent years.

For example, if an assessee incurs loss from any agricultural activity, then such loss cannot be adjusted against any other taxable income.





 

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