What is the meaning of Set Off of Losses?
Set-off means adjustment of losses against the profit or income of same Financial Year.
A set off could be an intra head set off or inter head set off.
Intra head Set-off means loss from one source of income can be set off against income from another source but in the same head of income.
Inter head Set-off means loss under one head of income can be set off against income from another head of income but in same financial year.
Given below is the detailed guide to set-off of losses
|Head of Income||Set-off|
|Same source under same head||Other source under same head||Inter head|
Rs. 2, 00,000)
|PGBP||Non-Speculation||Yes||Yes||Yes (Except Salary)|
|Owing & Maintenance race horses||Yes||No||No|
|Specified business under section 35AD||Yes||No||No|
|Capital Gain||Short term||Yes||Yes||No|
What is the meaning of Carry-forward of Losses?
If the losses cannot be set-off in the same year due to inadequacy of eligible profits, then such profits are carried forward to the next financial year for adjustment against the eligible profits.
|Head of Income||Carry Forward||Set off|
|For Assessment years|
|House property||8 years||Under Same head|
|PGBP||Non-Speculation||8 years||Under Same head|
|Speculation||4 years||Under Same source|
|Owing & Maintenance race horses||4 years||Under Same source|
|Specified business under section 35AD||Indefinite years||Under Same source|
|Capital Gain||Short term||8 years||Under Same head|
|Long term||8 years||Under Same source|
- Any loss under the head ‘Other income’ cannot be carried forward.
- Loss under the head ‘Income from Salary’ is not possible.
- In order to carry forward the losses, it is mandatory to file return of income on or before the due date of filing of Income tax return.
- House property losses and unabsorbed depreciation can be carry-forward even if return is filed after the due dates.
- In case return is filed after due dates, set-off and carry forward of losses of previous years are allowed but further carry forward of current year losses is not allowed.
- As per the provision of section 72(2), brought forward business loss is to be set-off before setting off unabsorbed depreciation.
- The order to be followed:
- Current year depreciation/ capital expenditure on scientific research & expenditure on family planning, to the extent allowed.
- Brought forward loss from business /profession
- Unabsorbed depreciation.
- Unabsorbed capital expenditure on scientific research.
- Unabsorbed expenditure on family planning.
- If income from a particular source is exempt from tax, then loss from such source cannot be set off against any other income which is chargeable to tax. (For Example: Share of profit from a firm)
Frequently Asked Questions
Query 1: I have a loss from house property of Rs. 2.5 lakhs as I have paid interest on home loan taken for purchase of my own house. I have earned salary income of Rs. 8 lakhs. Can I reduce my loss from house property against income from salary?
Ans: Yes, you can reduce your taxable income and set off the loss from house property but up to Rs. 2 lakhs only as inter head adjustment of loss under house property is allowed up to Rs. 2 Lakhs only and further, carry forward of Rs 50,000 is also not allowed. Therefore, now taxable income is Rs. 6 Lakhs (i.e. 8 Lakh – 2 lakh) and loss of Rs. 50,000 will lapse.
Query 2: I own two houses – one is self-occupied and other is rented. On self-occupied house property, I have paid interest of Rs. 2.5 lakhs on home loan taken for purchase of house. From rented house, I have earned rental income of Rs. 4 lakhs. Can I adjust loss on interest paid from self-occupied with my rental income?
Ans: Yes, loss on self-occupied house property can be adjusted against rental income but up to Rs. 2 Lakhs only, remaining loss of Rs. 50,000 will lapse.
Query 3: I have earned a rental income of Rs. 1,20,000/- p.a. and paid interest on home loan of Rs. 2,30,000/- taken for purchase of the same house. I have also earned business income of Rs. 5 lakhs during the year. How can I adjust the loss of Rs 2,30,000/- against income earned?
Ans: Firstly, your interest of Rs. 2,30,000/- will get adjusted against the rental income under same head and the remaining loss of Rs. 1,46,000/- [Rs. 1,20,000 – 36,000 (30% Standard Deduction) – 2,30,000] will get adjusted against business income as inter head adjustment is allowed up to Rs. 2 lakhs.
Query 4: I have earned rental income of Rs. 5 lakhs and interest paid on home loan taken for rented property is Rs. 4 Lakhs. Can I adjust full interest of Rs 4 Lakhs against my rental income or up to Rs 2 Lakhs?
Ans: Limit of Rs 2 lakhs will not apply on interest paid on loan taken for rented property, this limit is for self-occupied property only. Hence, in case of rented property full interest of Rs 4 lakhs will get set-off against rental income.
Query 5: I have a loss from house property of Rs. 2.5 lakhs as I have paid interest on home loan taken for purchase of my own house. I have earned business income of Rs. 1.2 lakhs. Can I reduce my loss from house property against business income?
Ans: Yes, you can adjust your loss from house property against business income of Rs. 1.2 lakhs and remaining loss of Rs. 80,000/- will be carried forward to next year and can be adjusted against house property income only.
Query 6: I have earned a salary income of Rs. 65,000 and a loss from non-speculative business of Rs. 27,000?
Can I set-off the loss of non-speculative business with salary Income?
Ans: Business loss cannot be set off against salary income. So, the business loss of Rs. 27,000 cannot be set off against the salary income of Rs. 65,000 and hence, it will be carried forward to next 8 assessment years.
Query 7: I have made a gain from intraday trading of Rs. 1.5 lakhs and incurred a loss of Rs. 2.8 lakhs in my newly startup business. Can I adjust loss of Rs 2.8 lakhs with profit of Rs 1.5 Lakhs?
Ans: Yes, you can adjust your loss from normal business with speculative business. Hence, loss of Rs 2.8 lakhs can be adjusted with gain of Rs 1.5 lakhs and remaining will be carried forward to next 8 assessment years.
Query 8: I have incurred a loss from trading in future and options and earned a profit from my manufacturing business. Whether the loss from future and options is eligible to set off against manufacturing business?
Ans: Yes, as trading in future and options considered as non-speculative business (i.e. normal business) and loss from one normal business can be set off against another. Therefore, loss from future and options can be set off against gain from regular manufacturing business.
Query 9: I have a short-term capital gain of Rs. 50,000 and a long-term capital loss of Rs. 20,000. Can I claim a set-off of loss of long term with short term capital gain?
Ans: Long term loss can be set-off only from other long-term gain. We cannot set off long term capital loss against short term capital gain. So, the long-term capital loss of Rs. 20,000 cannot be adjusted for short term capital gain of Rs. 50,000. Hence, the same will be carried forward to next year.
Query 10: I have done both intraday and future & options trading this year and incurred loss in intraday and gain in F&O. can I set-off the losses with the profit?
Ans: No, in this case, set-off is not allowed because as per law, intraday trading is considered as the speculative business activity although trading in future & options is a normal business activity. Loss from speculative business can be set off against speculative profit only and hence, this loss should be carried forward to next 4 assessment years.
Query 11: I have sold debt mutual funds and made long term loss of Rs 60,000. I made short term gains of Rs 25,000 on sale of listed equity shares. Can I set off the long-term loss against the short-term capital gain and pay tax on the net amount.
Ans: You cannot set off the long-term loss against the short-term gain. You can carry forward the long term loss of Rs 60,000 for 8 successive years and need to pay tax on the entire short term capital gains of Rs 25,000.
Query 12: In case of change in the constitution of business, can the loss be carried forward by the reconstituted entity?
Ans: Generally, the person incurring the loss is only entitled to carry forward the loss in subsequent year(s). However, in certain cases of reconstitution of the business-like amalgamation, demerger, conversion of proprietary firm into company or conversion of partnership firm into company, etc., the reconstituted entity is entitled to carry forward the unadjusted loss of predecessor entity (provided that conditions specified in this regard are satisfied).