Rules & Restrictions - Set Off and Carry Forward of Losses

In order to reduce the total amount of income tax payable, the Indian Income Tax Act allows you to compensate a taxpayer - from one source of income to another. There are lots of fine prints and restrictions. In this article, we explore the ‘set off’ and ‘forward’ terms and related terms to keep in mind when filing your tax plan.

Set Off and Carry Forward of Losses

To fix losses

As we are aware, income tax law classifies the five main sources of your income - salary, home property income, income from business or occupation, capital gains and income from other sources.

Set-off is the process of closing losses against profits, which can be lost or inter-head adjustment (described in the next paragraph). Carrying forward is the additional loss in the following years (could not be completely stopped against profit in one year) forward.

Intra-head and inter-head compatibility

The term intra-head adjustment refers to the determination of losses from one source of income against another source of income under the same ‘principal’. For example, loss on sale of shares (when not considered as business) is offset against profit from sale of property. Here the income from both the ‘sources’ is classified as the same ‘income head’ i.e. capital income. Similarly, profits from F&B and trading can be used to offset the losses of any other business as both sources are classified under the heading ‘income from business or profession’.

This refers to the offset losses compared to the earnings of one head of income from the other head of income. For example, offsetting business losses as opposed to income from capital gains. Respectively - The first step in loss reduction is interplanetary, coming later.

Carrying forward losses

If a sufficient amount of income does not occur in one year but the amount that is lost cannot be met, such additional losses may be carried forward to subsequent assessment years. The following points are noteworthy:

There have been losses upfront

Do not qualify for inter-head adjustment

These can only be adjusted against income from the same head.

There are restrictions for a few years for which losses can be taken forward. The period that could not be set within the specified period expires and cannot be taken further.

The lion's share of the losses can only be taken forward if the income tax return filed within the due date is declared.

Now that we understand the set conditions and move on, let's move on to the table below which gives a summary of the rules and restrictions.

It is important to note that losses from home property can be forwarded even if an income return is filed after a fixed date. Also the condition of filing the return within the stipulated date is relevant only for proceeding and leaving the loss in the same year.

Example

For a particular financial year, Mr. X lost ব্যবস 500,000 in his business, earned 1, 100,000 from home ownership, and raised 00 300,000 in capital. Let's set July 31 as the deadline for filing income returns. Mr. X, missed the deadline and filed a return on August 10th. In this case, Mr. XK will be allowed to incur a business loss of Rs. However, he can carry forward the loss from the home property without any restrictions.

Interesting information about off-the-shelf rules

Is it voluntary or obligatory to stop losses?

There is no direct answer to this question and we have to rely on the case law before making a decision. There are case laws where it was decided that section 80 is mandatory without loss before claiming a waiver (80C etc.).

Example:

Mr. X has a business loss of ০০ 200,000 and interest on FDs of, 300,000. Mr. X has 60 assignable contributions worth ০০ 200,000 and he would like to claim a full rebate from interest income without first reducing business losses.

This order will certainly benefit Mr. X but unfortunately it is not approved, the court has ruled against this practice. The loss must first exceed 1, 100,000 for a claim of ,000 80,000 against interest income.

In contrast, in the case of Sher. Ajay Kumar Singhania vs. DCIT Bangalore (2018), it was held that reducing business losses as opposed to capital gains is not mandatory. A simple lesson in the relevant section gives the same kind of idea. Does this mean that you can choose to carry forward your derivative losses without having to offset your capital gains? We can't just say for sure, since each case is different and the tax authorities may challenge your position.

What about choosing the order to close the inter-title?

In the case of Coated Fabrics (P) Ltd. vs. JCIT (200), it was assumed that the appraiser could choose the order of removal of the amount of loss in case of loss under multiple earnings. Also, there is a very old notification issued by the department in 1955 which explains the set-off process which includes the scope of exemption in case of total income.

Let us understand these with an example.

For example: Mr. X, a taxpayer has a business loss of Rs. 150,000, interest from FD of INR F00,000, long-term capital of Rs. 100,000,000 and exemption of Rs. 300,000. In this case Mr. X may first choose to compensate the business loss against the interest income (as it is imposed on the higher slab) there is nothing to do against the loss of balance and discount income compared to the capital gain.

Stop losses and margins for long-term gains on equity.

A question often asked by many taxpayers is, if I have a business loss of 00 100,000 and a long-term equity gain of ,000 90,000, can I not settle the loss against the capital gain by not paying any capital tax? Capital gains up to 1 lakh, and carry forward the entire loss?

Unfortunately, this is not allowed because the long-term equity gain is not a “discount”, even if you don’t pay tax on the first 1 million. Confused? The explanation may get a bit technical but will try to keep it simple.

Under the Income Tax Act, no income is considered exempt unless specified by law. For long-term gains on equity, the law simply states that if the total income of an appraiser includes income from long-term earnings on equity, a tax of 10% is to be paid on these gains above Rs 1 lakh. The word discount is not used anywhere. It seems unfair, we are discussing taxes.

You can, however, work with your CA to explore the possibility of applying the judgment to the CA. Ajay Kumar Singhania v. DCIT Bangalore (2018) for your case.

Losses from exempt sources of income.

Loss from any source of tax-exempt income cannot be offset against taxable income.

Determining losses against salary income.

Losses from home property (limited to Rs 2 lakh per annum) can be offset against salary income.

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