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May 21, 2021

How much loss you can carry forward and set off in Income Tax?

by Mahesh Mara in Income Tax

How much loss you can carry forward and set off in Income Tax?

Set off of losses means adjusting the losses against the profit or income of that particular year. Losses that are not set off against income in the same year can be carried forward to the subsequent years for set off against income of those years. Loss from exempted source of income cannot be adjusted against taxable income. 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.

What are the various types of set off of losses?

A set-off of loss could be an intra-head set-off or an inter-head set-off. 

a. An intra-head set-off:

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 falling under the same head. The process of adjustment of loss from a source under a particular head of income against income from other source under the same head of income is called intra-head adjustment, e.g., Adjustment of loss from business A against profit from business B. Following are some restrictions with respect to intra-head adjustment of loss:

  • Loss from speculative business cannot be set off against any income other than income from speculative business. However, non-speculative business loss can be set off against income from speculative business.
  • Long-term capital loss cannot be set off against any income other than income from long-term capital gain. However, short-term capital loss can be set off against long-term or short-term capital gain.
  • No loss can be set off against income from winnings from lotteries, crossword puzzles, race including horse race, card game, and any other game of any sort or from gambling or betting of any form or nature.
  • Loss from the business of owning and maintaining race horses cannot be set off against any income other than income from the business of owning and maintaining race horses.
  • Loss from business specified under section 35AD cannot be set off against any other income except income from specified business.

b. An inter-head set-off:

After making intra-head adjustment (if any) the next step is to make inter-head adjustment. If in any year, the taxpayer has incurred loss under one head of income and is having income under other head of income, then he can adjust the loss from one head against income from other head, E.g. Loss under the head of house property to be adjusted against salary income Following are some restrictions with respect to inter-head adjustment:

  • Before making inter-head adjustment, the assessee has to first make intra-head adjustment.
  • Loss from speculative business cannot be set off against any other income. However, non-speculative business loss can be set off against income from speculative business.
  • Loss under head “Capital gains” cannot be set off against income under other heads of income.
  • No loss can be set off against income from winnings from lotteries, crossword puzzles, race including horse race, card game, and any other game of any sort or from gambling or betting of any form or nature.
  • Loss from the business of owning and maintaining race horses cannot be set off against any other income.
  • Loss from business specified under section 35AD cannot be set off against any other income.
  • Loss from business and profession cannot be set off against income chargeable to tax under the head “Salaries”.

What is carry forward of unadjusted loss?

Many times, it may happen that after making intra-head and inter-head adjustments, still the loss remains unadjusted. Such unadjusted loss can be carried forward to next year for adjustment against subsequent year(s)’ income. Separate provisions have been framed under the Income-tax Law for carry forward of loss under different heads of income. Below are the provisions with respect to losses under various

A. Losses from House Property (Section 71B):

Losses from House Property can be carry forward up to next 8 assessment years from the assessment year in which the loss was incurred. It can be adjusted only against Income from house property. The loss can be carried forward even if the return of income for the loss year is belatedly filed.

B. Losses from Normal Business (Section 72):

Losses from Normal Business can be carry forward up to next 8 assessment years from the assessment year in which the loss was incurred. The loss can be adjusted only against Income from business or profession. It is not necessary to continue the business at the time of set off in future years. The assessee cannot carry forward loss if the return is not filed within the original due date.

C. Speculative Business Loss (Section 73):

Speculative Business Loss can be carried forward up to next 4 assessment years from the assessment year in which the loss was incurred. It can be adjusted only against Income from speculative business. The loss cannot be carried forward if the return is not filed within the original due date. It is not necessary to continue the business at the time of set off in future years. The assessee cannot carry forward loss if the return is not filed within the original due date.

D. Specified Business Loss under 35AD (Section 73A):

Specified Business Loss under 35AD can carry forward for unlimited period no time is specified for carry forward of the losses from the specified business under 35AD. It is not necessary to continue the business at the time of set off in future years. The assessee cannot carry forward loss if the return is not filed within the original due date. The loss from specified business can be adjusted only against Income from specified business under 35AD

E. Short term and Long term capital losses (Section 74):

Short term and Long term capital losses can be carry forward up to next 8 assessment years from the assessment year in which the loss was incurred. Long-term capital losses can be adjusted only against long-term capital gains. Short-term capital losses can be set off against long-term capital gains as well as short-term capital gains. Loss cannot be carried forward if the return is not filed within the original due date.

F. Losses from owning and maintaining race-horses (Section 74A):

Losses from owning and maintaining race-horses can be carry forward up to next 4 assessment years from the assessment year in which the loss was incurred. It cannot be carried forward if the return is not filed within the original due date. The loss can only be set off against income from owning and maintaining race-horses only.

G. Unabsorbed depreciation Section 32(2):

Unabsorbed Depreciation is that amount of unutilized depreciation which the assessee will not be able to claim as an expense due to lack of sufficient profit in P&L Account. Such unabsorbed depreciation can be set off against any heads of income and the remaining balance can be carried off till for any number of periods.

The above information can be summarised as follows:

SectionLosses to be carried forwardBrought forward losses set off againstTime LimitMandatory filing of return on time
71BLosses from House PropertyHouse Property Income8 yearsNo
72Losses from Normal BusinessBusiness Income8 yearsYes
73Speculative Business LossSpeculative Business Income4 yearsYes
73ASpecified Business Loss under 35ADSpecified Business IncomeUnlimitedYes
74Short term and Long term capital lossesShort term capital gain and Long term capital gain8 yearsYes
74ALosses from owning and maintaining race-horsesIncome from owning and maintaining race-horses4 yearsYes
32(2)Unabsorbed DepreciationAny income other than salaryUnlimitedNo

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