Profit & Loss are bound to happen in a business. Making profits can be exciting, but sometimes digesting losses can be a little difficult. Tax collection is the utmost priority of the ITD. But the lesser-known fact is that the ITD also provides relief when a taxpayer incurs a loss.
So, let’s discuss the relief available in case of losses: Set off and Carry Forward of Losses.
What is set off of losses?
As the name suggests, set-off means adjusting the losses against the profits of a particular financial year. The losses which are not set off can be carried forward to the subsequent years. A set-off could be an intra-head set-off or an inter-head set-off.
The set-off & carry-forward is done as under:
- Set off against the same source of income, i.e, same income head (intra head)
- Set off against another source of income,i.e, different income head (inter head)
Note: Since there cannot be any loss from “Income from Salary”, losses cannot be adjusted against this income.
Let’s take a few examples and understand!
- Zainab has 2 businesses. One of them incurred a loss of ₹10,000 and the other made a profit of ₹30,000. In this case, this loss of ₹10,000 can be set off against the profit of ₹30,000. So, only ₹20,000 is taxable under Income from Business & Profession head.
- Anjali has income from her clothing business (non-speculative) and a rental income of ₹60,000 from the house she owns. She incurs a loss of ₹40,000 from her clothing business. In this case, this loss of ₹40,000 can be set off against the rental income ₹60,000. So, only ₹20,000 is taxable under Income from House Property head.
Other Key Considerations
- Speculative and Non-speculative business losses have different rules for setting off & carry forward.
- LTCL can be set off against only LTCG.
- STCL can be set off against both STCG & LTCG.
- Loss from owning and maintaining race horses can be set off only against income from the business of owning and maintaining race horses.
- Loss cannot be set off against casual income like a lottery, crossword, puzzles, or other forms of gambling, etc.
What is carry forward of losses?
When the losses cannot be set off (inter-head or intra-head) because of insufficient income in the same year, then they can be carried forward and set off against the income of the subsequent year. The rules for carry forward differ slightly for different heads of income.
Other Key Considerations
- Carry forward is only possible when the Income Tax Return has been filed within the due date.
- Losses can be carried forward for 8 subsequent years. However certain losses like speculative Business Loss and loss from the business of owning and maintaining race horses can be carried forward for 4 years only.
Read about the rules under the New Tax Regime
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