Set off and carry forward of losses

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:

  1. Set off against the same source of income, i.e, same income head (intra head)
  2. 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!

  1. 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 is set off against the profit of ₹30,000. So, only ₹20,000 is taxable under Income from Business & Profession head.
  2. 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 is 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 must be set off against only LTCG.
  • STCL can be set off against both STCG & LTCG.
  • Loss from owning and maintaining race horses must 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

Read more in detail about Set Off and Carry Forward of Losses under Income Tax - Learn by Quicko

4 Likes

Hi Team, Greetings
A quick question. Would appreciate your review & advise.

For the Current financial year, I have profits in Short & long term Capital Gains. On the other hand I have losses in both, Intraday (speculative) and F&O trading.

(1) Can I offset my short & Long term capital gains, against any of these losses.

(2) Additionally, any additional income that I may have from Interest or Dividend, Can I offset these also from the given losses

Would appreciate an early response (excuse the urgency).

Many Thanks
Best Regards

Hi @Tony_Almeida

As per the law, STCL can be adjusted against STCG & LTCG and LTCL can be adjusted only against LTCG.
FnO trading is considered non-speculative business income & intraday is considered speculative business income.
You can set off losses of only FnO losses against the capital gains as it is a non-speculative income. Speculative losses can be set off only against speculative income.

  1. You can also set off losses from the “Income from Other Sources” head.

Refer to Set Off and Carry Forward of Losses under Income Tax - Learn by Quicko for more information.
Hope this helps.

1 Like

Hi Shrutika, Greetings again
Firstly, Thank you so very much for this prompt response .Was awaiting to pay taxes, if any basis your response.

Please excuse my lack of knowledge on the subject, hence a re-clarification:
I got the (2) point clearly, that I can set off F&O losses against Income from other sources.

However, on the STCG & LTCG, let me re-check if you meant that I can set off my F&O losses against both STCG & LTCG that I have.

Request a re-affirmation to the above

Appreciate

Regards

Team, Greetings again
Please help Re-validate

Thanks n Regards

Hi @Tony_Almeida

You can set off FnO losses against capital gains (both STCG & LTCG) in the same year only, ie, the loss and profit of the same year. Meaning, you cannot set off FnO losses if it is carried forward against capital gains income. It can then be set off only against the business income.

Hope this helps.

After importing from Zerodha, the STCG (loss) is automatically set-off against LTCG (profit) although LTCG (profit) is exempted since it < Rs 1 lakhs. Therefore, STCG (loss) should not be offset against it, rather it could be carry forwarded. How to alter in Quicko?

Hi @SAAD625

As per the Income Tax Act, losses are set off first and then the remaining are carried forward.
The 1 lakh LTCG exemption is applicable on taxable capital gains and taxable long-term capital gain is arrived after setting off of losses

Hope this clarifies.

Hi Ms. Shrutika,

Just to be sure I understand what you’re saying.

Let’s say last FY was the first year I sold shares and had a loss of ₹60,000. Lets also say I have other income which is more than the 0% income slab for my age each year, so I can normally (if no CFL available) only exempt ₹1L long term capital gains each year.

This FY I sell shares and and have realized a gain of ₹40,000. If I don’t sell any more shares, what you’re saying is the IncomeTax act requires the ₹40,000 to first be offset against the carry forward loss of ₹60,000 to give a LTCG income of 0. Therefore, only ₹20,000 is left to carry forward after this FY and the ₹1L exemption is not used in any way? In other words I would have lost ₹40,000 of my carry forward loss without saving a paisa on my taxes? So, in a case like this if I want to “get the full benefit” of the ₹60,000 CFL I should have long term capital gains of at least ₹1,60,000?

Thanks & regards,

Russell

Suppose I have short term capital losses from foreign shares of 10 lakhs. I also have long term capital gains from Indian shares of 10 lakhs.

Do I have the option of carrying forward the ST loss from foreign shares so that I can set if off against short term capital gains in foreign shares in future years or must I necessarily first set off the ST capital loss against the LT capital gains in the current year before I am allowed to carry the loss forward?

Hi @Noob

When it comes to setting off capital losses and gains, the general rule is to set off short-term capital losses (STCL) against any capital gains, regardless of foreign or Indian shares, before carrying forward the remaining losses. In your case, you have a short-term capital loss (STCL) of ₹10 lakhs from foreign shares and long-term capital gains (LTCG) of ₹10 lakhs from Indian shares.

Therefore, you must first set off the STCL of ₹10 lakhs against the LTCG of ₹10 lakhs in the current year. After setting off the loss against the gains, if any loss remains, you may carry forward it to future years.

Hi @Shrutika_Shah or @Muskan_Balar,

Would one of you be kind enough to validate what I have said in my post #9 (3 messages above this one), please?

Thanks,

Russell

Hi @Russell

As per the law, LTCG up to ₹1 lakh is not taxable every year.

Assuming ₹60,000 to be LTCL and 40,000 to be STCG, then the set-off cannot happen as LTCL can only be set off against LTCG.

As per the law, your current year’s losses will be set off first, and then the brought forward losses.

Yes, in order to “get the full benefit” of ₹60,000 LTCL you will have to have a LTCG of ₹1,60,000.

Hi @Shrutika_Shah @Muskan_Balar

I have a brought forward long term loss. Also, this year there is a short term capital loss. Can I carry forward these losses? While filing ITR, these losses are getting set off again LTCG (profit is less than <100000) so doesnt qualify for taxation. Would like to set off losses against income when it qualify for taxes.

In case yes, could you guide me how to carry forward and not set off against the income in ITR 2…

Hi @Shweta_Agrawal

As per the rules, LTCL can set off only against LTCG. However, STCL can be set off against STCG or LTCG.
After set off, if the LTCG remains and if its less than ₹1 lakh, then it is not taxable.

Also, first, the set off of losses takes place against appropriate income, and then if still any loss remains, it is then carried forward.

Hope this clarifies.

Thanks Shrutika.

Can I choose to not set off the loss against the current income but instead carry forward it? Do we have that option

Hi @Shweta_Agrawal

No. That is not possible.

Your current year losses will be first set off, then your brought forward losses will be set off. If still the loss remains, it will be carried forward.

You cannot choose to not set off and carry forward.

Hi @Shrutika_Shah,

Thank you for response (post #13 ) in response to my query (post #9). I should have clarified that the CFL of ₹60,000 was a long-term capital loss in my original post. Your statement, “Yes, in order to “get the full benefit” of ₹60,000 LTCL you will have to have a LTCG of ₹1,60,000.” is most helpful as is your “Your current year losses will be first set off, then your brought forward losses will be set off. If still the loss remains, it will be carried forward.”

May I respectfully offer a suggestion? The first post in this thread as well as the Quicko link mentioned on the last line of the article uses “can” several times in reference to loss set off. When I read “can be set off” or “can set off”" it gives me the impression that I have a choice (it’s optional). Your responses saying “will be set off” (or alternatively “must be set off”) make it a lot clearer what will happen. As is your "You will not be able to chose to not set off and carry forward." Perhaps changes can be made to the relevant text?

And, last but not least, I really appreciate this forum and how responsive Quicko team members (like you) have been.

Thank you!

Russell Gonsalves

1 Like

I have Capital losses from sale of shares carried forward from previous years.
The oldest is Rs 69764 from AY 2016-2017.

Last year, that is, FY 2021-2022 I had a Capital Gain of Rs 27000.

How should I fill in Schedule CFL for this year, that is FY 2022-2023?
Should I enter Rs 42764 (being 69764 minus 27000) in the row for AY 2016-2017?

Hi @vivek25

If you’d correctly reported these losses from AY 2016-17 and your gains from FY 2021-22, you would be able to see the amount ₹42,764 under schedule BFLA in this FY 2022-23 on the income tax e-filing portal.