In India, Income Tax is payable by every person on the total income, earned during the previous year at the rate of tax applicable for assessment year. There are five sources for income classified as:
Head of Income
Nature of Income
|Income from Salary/Pension||Salary and pension income is covered under the head of Salary|
|Income from House Property||Rental Income|
|Income from Capital Gains||Income from sale of capital asset e.g house property, shares etc.|
|Income from Business and Profession||Self employed Income, Running own business, freelancer, Doctors, Chartered Accountants etc.|
|Income from Other Sources||Interest income from Saving Bank Account, Fixed Deposits.|
If a person has earned income from one source and has suffered loss from another source then, such loss is allowed to be reduced from the Income and this concept is known as Set off of Loss. However, If such loss is more than the Income and the full amount of loss cannot be set off then it can be carried forward. This concept is known as Carry Forward of Loss.
|Particulars||Mr. Ajay||Mr. Vijay|
|Salary Income |
|House Property Loss |
|Total Income |
|Set off of Loss||Loss set of is Rs. 1,50,000 |
|The Loss of Rs.54,000 will be forward to the next year.|
Note: Losses from the exempted source of Income cannot be set off against any taxable source of Income, and no losses can be set off against casual income i.e. winning from lotteries, races, card games, betting etc.
Meaning of Set off and Carry forward
Set off means adjustment of the losses against the income/profit of that financial year. Carry forward of losses to subsequent Assessment Years is if there are no adequate profits subject to the conditions stated in the Act.
Intra-Head Set off and Inter-Head Set Off
Intra-head Set off :
As per Section 70 of Income Tax Act, 1961, the loss from one source of income can be set off against any income of other sources under the same head of income. For example: Loss from Cloth business can be set off against profit from steel business.
Exceptions under intra-head adjustment of loss in following cases:
- Losses from speculation business- Speculative business losses can only be set off from the income of another speculative business; it cannot be adjusted against any other income. Speculative Losses cannot be set off against any other Business or Professional Income but non-speculative business loss can be set off against the speculative business income.
- Long-term capital Loss – The Loss of Long Term Capital Asset can be set off only from the income of Long Term Capital Asset and not from the income of short term capital asset. However, the loss from short-term capital asset can be set off from the income of short-term asset as well as long tern capital asset.
- Losses of owning and maintaining race horses –Loss on account of owning and maintaining race horses can be set off only from the income from the other business of owning and maintaining race horses and not from any other income.
- Losses of specified Business referred to in section 35AD – If a person is doing a ‘specified business’ mentioned under section 35AD and suffers a loss from such specified business then such loss can be set off only from the income of another ‘specified business’ and not from any other source of Income. But loss from other business can be set off against the profit of the specified business in that financial year.
Inter-head Set off :
The next step of set off of losses is Inter –head adjustment. Under Section 71 of Income Tax Act, 1961 if the taxpayer has sustained a loss under one head of income and has income under another head of income, and then the taxpayer can adjust the loss from one head against income from other head. For e.g. loss from house property can be adjusted against income from capital gains of the same textile business.
- Loss from House Property - House Property Income Losses can be set off against profits from other heads. It can be adjusted against salary income, Business income, Income from capital gain, and income from other sources except for casual income.
- Losses from non-speculative business - Non-speculative Business Losses can be set off under any other head except income from salary i.e., it can be done from income from house property, capital gain income and other sources income.
In the following cases, losses cannot be set off under inter-head adjustments.
1. Speculative Business Loss.
2. Specified Business Loss.
3. Capital Gain Income Losses
4. Income Losses from owning and maintaining race Horses
Carry Forward of Losses
If any loss is more than the Income and full amount of loss could not be set off then it will be carried forward to the next year. This concept is known as Carry Forward of Loss. There are different provisions for carrying forward of loss under different heads of income under the Income-tax Law. Like:
- Non-Speculative Business Losses - Section 72 of Income Tax Act,1961 provides that an Assessee can carry forward Non-speculative business loss up to 8 years immediately succeeding the Assessment Year in which the loss has been incurred. Such loss can be set off only from business income.
Where, Non-Speculative Business means any income derived from normal course of business activity.
- Speculative Business Losses – As per Section 73of Income Tax Act,1961, any loss computed in respect of speculative businesses can be carried forward up to 4 years immediately succeeding the Assessment year in which the loss has incurred.
This loss can be adjusted only against Speculation Business Income.
Where, Speculation Business deals with speculative transaction i.e. purchase or sale of a commodity including stocks and shares. Any income from Intra-day transaction is considered as speculative income and taxed as per normal slab rates.
- House Property Income Losses – Section71B of Income Tax Act, 1961 provides that where the assesse incurs any loss under “Income from House Property” and such loss is not fully adjusted under any head of income in the same assessment year, then it can be carry forward upto 8 years immediately succeeding the Assessment year (AY) in which the loss has incurred. It can be adjusted only against the same head of income i.e. House property income.
- Specified Business Loss – As per Section 73A, any loss in Specified business referred to in Section 35AD can be Carried forward subject to the following conditions:
a) It can be set off against the profits and gains of any specified business, assessable for that assessment year; and
b) If the loss cannot be entirely so set off, the amount of loss not set off can be carried forward to the later assessment year and so on.
- Capital losses – As per Section 74 of Income Tax Act, 1961, where an individual is not able to set off the capital loss in the same year, in such case both Long Term and Short-Term loss can be carried forward for 8 Assessment Years immediately succeeding the assessment year in which loss was first computed.
Section 80 of Income Tax Act- Conditions to carry forward of loss:
Following losses can be carried forward only if Income Tax Return is filed on or before the due date as per section 139(1) of Income Tax Act, 1961:
a) Losses of Trading business or Non- Speculative Business Loss u/s 72
b) Losses of Speculative Business u/s 73
c) Losses of Capital Gains u/s 74
d) Losses of owing & maintaining of race horses u/s 74A.
Following losses can be carry forward whether Income Tax Return is filed on, before or after the due date prescribed as per section 139(1) of Income Tax Act, 1961:
a) Losses of House Property u/s 71B
b) Losses of Specified business referred in section 35AD
c) Unabsorbed depreciation
d) Losses of Income of other sources