⭐Set-off of Losses
Definition: Set-off refers to the adjustment of losses against income or profits of the same financial year to reduce the tax liability of the taxpayer.
- Intra-head Set-off:
- This allows taxpayers to set off losses from one source under a specific head of income against income from another source under the same head.
- For example, a loss from one house property can be set off against income from another house property.
- Inter-head Set-off:
- This permits the adjustment of losses from one head of income against income from another head.
- For instance, a loss under the head “Income from House Property” can be set off against salary income or business income.
- Restrictions on Inter-head Set-off:
- Capital Gains: Losses under the head “Capital Gains” cannot be set off against income from any other head.
- Speculative Business Loss: Losses from speculative business cannot be set off against income from any other source except speculative income.
⭐Carry Forward of Losses
Definition: If a taxpayer cannot fully set off losses in the current financial year, the unadjusted loss can be carried forward to subsequent years for set-off against income in those years.
- Losses eligible for Carry Forward:
- House Property Losses: Can be carried forward for up to eight subsequent assessment years. They can only be set off against income from house property.
- Business Losses (Non-Speculative): Can be carried forward for up to eight assessment years and can be set off against profits from any business or profession (except speculative business).
- Speculative Business Losses: Can be carried forward for up to four assessment years but can only be set off against income from speculative business.
- Capital Losses: Short-term capital losses can be set off against any capital gains (short-term or long-term), while long-term capital losses can only be set off against long-term capital gains. Both can be carried forward for up to eight assessment years.
- Loss from Owning and Maintaining Race Horses: Can be carried forward for up to four assessment years and can only be set off against income from owning and maintaining race horses.
- Unabsorbed Depreciation:
- Depreciation not fully adjusted in a year can be carried forward indefinitely and can be set off against any income (except salary).
Special Considerations
- Mandatory Filing of Return:
- To carry forward losses (except for house property losses), it is mandatory to file the tax return within the due date specified under Section 139(1) of the Income Tax Act.
- Restrictions on Set-off and Carry Forward:
- Losses from exempted sources of income cannot be set off or carried forward.
- Change in Ownership:
- In cases of business reorganization (like amalgamation or demerger), specific provisions apply to the carry forward and set-off of accumulated losses.
- Section 80 Deductions:
- Losses must be set off before applying deductions under Chapter VI-A (e.g., Section 80C to 80U) of the Income Tax Act.
Reporting and Documentation
- Importance: Proper documentation and accurate reporting are crucial for claiming the set-off and carry forward of losses.
- Records: Taxpayers must maintain records detailing the nature of losses and the income against which these losses are adjusted.
- Tax Return: It’s essential to fill out the relevant schedules in the income tax return forms to detail these losses properly.
Understanding these provisions helps taxpayers optimize their tax planning by efficiently utilizing losses across financial years, thereby reducing their overall tax liability. Proper compliance with reporting requirements ensures eligibility for these tax benefits.