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, the set off of loss is allowed subject to conditions.

 

·         Set-off of losses:

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

 

·         Carry forward of losses:

If, in a particular FY, amount of loss incurred under a particular head of income is not fully set-off against the income from the said head of income due to inadequacy of income, such loss may be carried forward to e subsequent years and set-off against income of those years, under the same head of income subject to certain exceptions. 


What are the provisions for set-off of losses?

Ans.

A set-off of losses can be an intra-head set off or an inter-head set off.

 

·         Intra-head set off: The losses from one source of income can be set off against income from another source under the same head of income subject to certain exceptions as mentioned in below table.

 

For eg: Loss from house property A can be set off against profit from house property B, where house property A is one source and house property B is another source and the common head of income is “house property”.

 

·         Inter-head set off: After intra-head adjustments of losses, balance losses can be set-off against income from other heads subject to certain exceptions as mentioned in below table.

 

For eg: Loss from house property can be set off against salary income.

 

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

                          

* From FY 2017-18 onwards, if in any FY, assessee incurs a loss under head ‘IFHP’, he shall be permitted to set off such loss against any other head of income only up to a maximum of Rs. 2,00,000.


What are the provisions for carry forward of losses?

Ans.

The losses that remain unadjusted during previous year can be carried forward for adjustment against income of subsequent years. However, the loss so carried forward can be set-off only against same head of income, i.e. the benefit of “inter-head’ adjustment is lost i.e. past year losses can be set-off against income from that respective head of income.

 

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 FYs eligible for Carry Forward of losses and set-off

Loss From IFHP

IFHP

8

Loss in PGBP (Specified Business)

Gains from PGBP (Specified Business)

Unlimited

Loss in PGBP (Speculative Business)

Gains from PGBP (Speculative Business)

4

Loss in PGBP (Normal Business)

Gains from PGBP (Normal Business)

8

LTCL

LTCG

8

STCL

LTCG and STCG

8

Owning and Maintaining Race Horses

Owning and Maintaining Race Horses

4

Note: Any loss from Income from other sources (normal) which does not get adjusted in a particular FY cannot be carried forward in subsequent year.

Can an individual who is opting to be taxed as per the New Tax regime, claim set-off of house property losses against any other heads of income?

Ans.

No. As per amendments in Finance Act, 2020 (effective from FY 2020-21), any individual opting to be taxed as per New Tax Regime cannot set-off loss from house property against any other heads of income i.e. such house property loss can be set-off only against ‘Income from any other house property’ in the same year.

 

Further, individuals opting to be taxed under New Tax regime cannot set-off such house property losses which are not rented i.e. loss due to interest re-payment on self-occupied house property cannot be allowed to be set-off or carry forward against income from other rented house property also.

Can carry forward and set-off of losses be allowed if ROI not filed?

Ans.

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 ROI. However, loss under the head “Income from House Property” can be carried forward even if the ROI has not been filed within prescribed due date.

 

Further, if return of the current year is not submitted within due date, losses of the past years are not affected.

What is the process for carry forward and set-off of losses?

Ans.

The process of setting off of losses and their carry forward may be covered in the following Steps:

Step1- Determination of loss under each respective source of income after claiming exemptions, if any under such head of income

Step 2- Intra head adjustment of losses wherever allowed.

Step 3-Inter head adjustment of losses wherever allowed, where such losses are not fully set-off in step 2 above.

Step 4- Carry forward of losses wherever allowed, where such losses are partly/ fully not set off under step 2 and 3.

Can loss under one head of income (say IFHP income) for a particular FY be set-off against income under any other head of income (say Income from IFOS) for some other FY?

Ans.

No, losses from one head of income (Say IFHP income) for a particular FY cannot be set-off against income under any other head of income (say Income from IFOS) for some other FY. The said losses from House property can be carried forward and set-off only against income from house property in the subsequent FY.

A NR sold an immovable property and there was a capital loss of Rs. 10 lakhs during FY 2018-19. 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 2019-20. Income from STCG on shares sold on exchange: Rs.5,00,000 Interest income from Bank deposits: Rs.2,00,000 Loss from house property after deducting housing loan interest: (Rs.1,50,000) She intends to know her taxable income for the FY 2019-20.

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

NRI has following income for the FY 2020-21: Income from STCG on shares sold on exchange: Rs.5,00,000 Interest income from Bank deposits: Rs.2,00,000 Loss from house property after deducting housing loan interest: (Rs.2,50,000) She intends to know her taxable income for the FY 2020-21.

Ans.

Taxable income for the FY 2020-21 will be Rs. 5,00,000. Loss from house property will be allowed to be set-off against other income only up to the extent of Rs.2,00,000.

NRI has following income for the FY 2020-21: Income from House property A: Rs.5,00,000 Loss from House property B after deducting housing loan interest (Self-occupied): (Rs.10,00,000) Interest income from Bank deposits: Rs.6,00,000 She intends to know her taxable income for the FY 2020-21.

Ans.

Taxable income for the FY 2020-21 will be Rs. 4,00,000. Loss from house property B will be first allowed to be set-off against Income from House Property A. The balance loss from house property B will then be allowed to be set-off from other income, but only up to the extent of Rs.2,00,000.

Will the answer to above FAQ k. change in case the individual opts to be taxed under New Tax regime?

Ans.

Yes. If the individual opts to be taxes under New Tax Regime, he cannot claim set-off of losses of house property B which is not rented against income from house property A. Further, he cannot even claim set-off of such losses against any other sources of income i.e. interest income from Bank Deposits in the above example. Therefore, his total income for FY 2020-21 under New Tax Regime shall be Rs. 11,00,000/-.

NRI has incurred loss on share transactions in FY 2020-21, but has not filed her ROI within the due-date prescribed under the Act. Further, she also has losses carried forward from previous years prior to FY 2020-21. Will she be allowed to carry forward such loss to the future years?

Ans.

Loss for FY 2020-21: 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.

 

Losses for previous years prior to FY 2020-21: Yes, she will be allowed to carry forward the losses incurred by her in previous years prior to FY 2020-21 if she has filed her returns within the prescribed due dates in those years.

Will the answer to the FAQ m. above change, in case she has incurred losses from house property for the relevant FY 2020-21, 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 for FY 2020-21 was not filed within the prescribed due date.

Can loss from any source which is 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 ‘IFOS’. 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.

Can loss from PGBP (other than speculative) be set-off against salary income?

Ans.

No. A loss from business or profession can be set-off against all income heads other than salary.