Set-Off and Carry forward of Losses

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

Ans.

While one endeavors to derive income, the possibility of incurring losses cannot be ruled out. The Income tax laws in India have recognized this and thus, the provisions of the Act provide for adjustment and utilization of the losses against the income earned. However, there are conditions subject to which the set off of loss is allowed.

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

However, if, in a particular AY, 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 Set-off of losses are tabulated in below:

Set-off against following Sources of Income

Source of Loss

IFS

IFHP

PGBP (Normal Business)

PGBP (Specified Business)

PGBP (Speculative)

LTCG

STCG

IFOS

IFS

No Loss

IFHP

v

v

v

v

v

v

v

v

PGBP (Normal Business)

×

v

v

v

v

v

v

v

PGBP (Specified Business)

×

×

×

v

×

×

×

×

PGBP (Speculative Business)

×

×

×

×

v

×

×

×

LTCL

×

×

×

×

×

v

×

×

STCL

×

×

×

×

×

v

v

×

IFOS (Normal)

v

v

v

v

v

v

v

v

Note:

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

 

2.    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 within prescribed due date.

 

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

Ans. 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 table, i.e. reproduced in answer to FAQ a. above.

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 IFOS)?

Ans. 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 summarised in the table i.e. reproduced in answer to FAQ a. above.

Can loss remaining after inter-head adjustment can be carried forward in order to adjust against income of future years?

Ans.

The losses remaining even after inter-head adjustment are allowed to be carried forward and set-off as under:

Loss to be carried forward

Permitted Set-off

No. of AYs eligible for Carry Forward of losses and set-off

Loss From House Property

House Property

8

Loss in Specified Business

Specified Business

Unlimited

Loss in Speculative Business

Speculative Business

4

Other Business Loss

Business and Profession

8

Long Term Capital Loss

Long Term Capital Gains

8

Short Term Capital Loss

Long Term Capital Gains and Short Term Capital Gains

8

Owning and Maintaining Race Horses

Owning and Maintaining Race Horses

4

A NR sold an immovable property and there was a capital loss of Rs. 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?

Ans.

It shall be first necessary to ascertain the nature of the loss, i.e., whether it is STCL or LTCL. STCL can be set-off against both LTCG and STCG. LTCL can be set off only against LTCL.

Further, 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 ROI has been filed within the prescribed time limit.

NRI has following incomes for the FY 2016-17. Income from STCG on shares sold on exchange: Rs.5,00,000, Interest income from Bank deposits: Rs.2,00,000 and Loss from house property after deducting housing loan interest: (Rs.1,50,000). She intends to know her taxable income for the FY 2016-17.

Ans. Taxable income for the FY 2016-17 will be Rs. 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 ROI within the due-date prescribed under the Act. Will she be allowed to carry forward such loss to the future years?

Ans.

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

Will the answer to the above question differ in case she has incurred losses from house property for the relevant AY, but failed to file ROI?

Ans.


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 ROI 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?

Ans.

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.

NRI has incurred a loss under the head ‘Income from Other Sources’. He does not have any income from other source. Can he carry forward the loss under Other Sources to subsequent years?

Ans.


Loss under the head ‘Income from Other sources’ cannot be carried forward and shall not be available for set-off in the subsequent years.

What will be the treatment of LTCL arising on transfer of equity shares of a company or a unit of equity oriented fund or a unit of business trust made on or after April 1, 2018?

Ans. LTCL arising from transfer made on or after April 1, 2018 will be allowed to be set-off and carried forward in accordance with existing provisions of the Act. Therefore, it can be set-off against any other LTCG and unabsorbed loss can be carried forward to subsequent 8 years for set-off against LTCG.