Income Tax is a combined tax on the total income of a person earned during a period of one year. There might be cases where a person has different sources of income under the same head of income. Similarly, he may have income under dissimilar heads of income. It might also happen that the net result from a particular source/head may be a loss. There can be set off and carry forward of losses against other sources/head in a particular manner. This is all needed when you are going to file Income Tax Returns
Set Off and Carry Forward of Losses in Business
Example - Where a person carries on two businesses and one business gives him a loss and the other a profit, then the income under the head ‘Profits and gains of business or profession’ will be the net income i.e. after the adjustment of the loss. Similarly, if there is a loss under one head of income, it should normally be adjusted against the income from another head of income while computing the Gross Total Income, of course subject to certain restrictions. These provisions for set off and carry forward and set off of loss are contained in sections 70 to 80 of Income tax Act
There are whole lot of combinations when it comes to adjusting profits and losses intra and inter heads, I shall bring to you some very important ones which are practically very significant
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Steps in Set Off and Carry Forward of Losses
Before we get any further, let’s understand the steps that need to be followed for carrying out this calculation. Briefly, it’s about three simple steps –
- The profit/losses arising from different sources but same head, should be adjusted
- If you have any loss remaining to be set-off under step 1, you can now adjust with profit under other heads in the same assessment year.
- If you have any loss remaining to be set-off after step 2, you will have to carry forward that to next year.
Below listed are important set-off and carry forwards combinations you must keep in mind before claiming set-off and carrying forward losses –
- Long term capital loss can be set off only against long term capital gain. However, short term capital loss can be set off from any capital gain (long-term or short-term)
Situation I Situation II
Short-term capital gain (-) 2, 00,000 (+) 5, 00,000
Long-term capital gain (+) 5, 20,000 (-) 1, 80,000
Save Long Term Capital Gain Tax
Solution:
In situation I, short-term capital loss of Rs. 2, 00,000 will have to be set off from long term capital gain. Hence, the net long-term capital gain in this case shall be Rs 3,20,000.
In situation II, it is not possible to set off long term capital loss from short-term capital gain. Hence, short-term capital gain of Rs. 5, 00,000 shall be taxable and Rs. 1, 80,000 of long-term capital loss shall have to be carried forward
How to calculate Long Term Capital Gain
2. In case of Inter-Head adjustment, any capital loss, whether short-term or long-term, shall not be allowed to be set off against income under any other head. It shall however be allowed to be carried forward.
3. From the Assessment Year 2005-06, any loss under the head ‘Business and Profession’ cannot be set off against income from ‘Salaries’. However, it can be set off against the Income from any other head.
Income from salary 2, 00,000 2,00,000
Income from Bus/Prof (-) 50 ,000 (-) 50 ,000
Income from House Property - 80,000
Solution
In situation I his GTI would be 2, 00,000 and his loss from business and profession will be carried forward ( any loss under the head Business & Profession cannot be set off against any income from Salary).
In situation II business loss can be set off against income from House Property and his Gross Total Income would be Rs. 2, 30,000.
4. All losses are not allowed to be carried forward. Another very important aspect is that in case of carry forward, losses can be only set off under the same head of income only. Inter head adjustment is not allowed.
Only the following losses are allowed to be carried forward and set off in the subsequent years.
a) House property loss
b) Business loss
c) Speculation loss
d) Capital loss
e) Loss on account of owning and maintaining race horses
Hence any loss under the head income from other sources is not allowed to be carried forward (except race horses).
5. A loss under the head house property will be allowed to be carried forward for 8 assessment years to claim it as a set off in the subsequent years under the head Income from house property
6. Business losses can be adjusted only against business income: Business income may be from the same business in which the loss was incurred, or may be any other business.
Duration of Set off Losses
Now the question that arises is how long i.e for what period can we set off and carry forward of losses can be done. Lets understand –
Each year’s loss is a separate loss and no loss shall be carried forward for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed. Therefore, a loss of previous year 2002-2003, i.e. assessment year 2003-2004 can be carried forward till assessment year 2011-12. Besides the above, the following can also be carried forward indefinitely, as per income tax law:
i) Unabsorbed depreciation
ii) Unabsorbed capital expenditure on scientific research;
iii) Unabsorbed expenditure on family planning
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