How to set off and carry forward of losses

Profit and loss are part and parcel of a business. Income tax provisions provide rules for setting off losses against income or profits, or carrying forward the losses to the next few years. Carry forward or set-off of losses allows the tax payer to reduce taxable income in the current year and year in which the losses are carried forward. These provisions are:

Intra-head set off
Loss from one source of income can be set off against profit from another source of income that falls under the same head of income. This means that loss from one business can be set off against profit from another business. However, loss from a speculative business cannot be set off against profit from a non-speculative business. Also, long-term capital loss can be set off only against long-term capital gains. However, short-term capital loss can be set off against long- and short-term capital gains.

Inter-head set off
The loss of one head of income may be set off against income/profit from another head, in line with the IT laws. Loss from house property can be set off against income under any other head. Similarly for loss from business (non-speculative), except income from salary. Speculative business loss, specified business loss, loss from horse racing or capital losses cannot be set off against any other head of income.

Carry forward of losses
After the above set offs are made, there could still be unadjusted losses which may be carried forward to future
financial years. Carry forward and set-off of losses is possible for eight subsequent financial years.

Points to note

  • Losses cannot be set off against casual income received, such as lottery.
  • Carry forward of losses is permitted only when return is filed with the Income Tax Department in time.

Content on this page is courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.

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