Set Off and Carry Forward of Losses (2024)

Profit and losses are two sides of a coin. Losses, of course, are hard to digest. However, the Income-tax law in India does provide taxpayers some benefits of incurring losses too. The law contains provisions for set-off and carry forward of losses which are discussed in detail in this article.

Set off of losses

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

Intra-head Set Off

The losses from one source of income can be set off against income from another source under the same head of income.

For eg: Loss from Business A can be set off against profit from Business B, where Business A is one source and Business B is another source and the common head of income is “Business”.

Exceptions to an intra-head set off:

Losses from a Speculative business will only be set off against the profit of the speculative business. One cannot adjust the losses of speculative business with the income from any other business or profession.
Loss from an activity of owning and maintaining race-horses will be set off only against the profit from an activity of owning and maintaining race-horses.
Long-term capital loss will only be adjusted towards long-term capital gains. However, a short-term capital loss can be set off against both long-term capital gains and short-term capital gain.
Losses from a specified business will be set off only against profit of specified businesses. But the losses from any other businesses or profession can be set off against profits from the specified businesses.

Inter-head Set Off

After the intra-head adjustments, the taxpayers can set off remaining losses against income from other heads.

Eg. Loss from house property can be set off against salary income.

Given below are few more such instances of an inter-head set off of losses:

Loss from House property can be set off against income under any head
Business loss other than speculative business can be set off against any head of income except income from salary.

One needs to also note that the following losses can’t be set off against any other head of income:

a. Speculative Business loss

Carry forward of losses

After making the appropriate and permissible intra-head and inter-head adjustments, there could still be unadjusted losses. These unadjusted losses can be carried forward to future years for adjustments against income of these years. The rules as regards carry forward differ slightly for different heads of income.

These have been discussed here:

Losses from House Property :

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

Losses from Non-speculative Business (Regular Business) Loss

Can be carry forward up to next 8 assessment years from the assessment year in which the loss was incurred
Can be adjusted only against Income from business or profession
Not necessary to continue the business at the time of set off in future years
Cannot be carried forward if the return is not filed within the original due date.

Speculative Business Loss

Can be carry forward up to next 4 assessment years from the assessment year in which the loss was incurred
Can be adjusted only against Income from speculative business
Cannot be carried forward if the return is not filed within the original due date.
Not necessary to continue the business at the time of set off in future years

Specified Business Loss under 35AD

No time limit to carry forward the losses from the specified business under 35AD
Not necessary to continue the business at the time of set off in future years
Cannot be carried forward if the return is not filed within the original due date
Can be adjusted only against Income from specified business under 35AD

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
Cannot be carried forward if the return is not filed within the original due date

Let us understand with an example-

Mr P has invested in equity shares. Below are the details related to his capital gain/loss transactions for different years.

A.Y.	STCL during the year	LTCL during the year	STCG during the year	LTCG during the year	STCG taxable	LTCG taxable	Balance STCL and LTCL to be c/f
2015-16	3,000	1,000	-	-	-	-	STCL- 3,000 LTCL- 1,000
2016-17	-	1,300	5,600	-	2,600 (5,600- 3,000) Set-off against LTCL	-	STCL- Nil LTCL- 2,300
2017-18	800	-	-	7,000	-	4,700 (7,000- 2,300- 800) Set-off against STCL and LTCL	STCL- Nil LTCL- Nil
2018-19	1,200	4,000	3,000	9,000	3,000*	3,800* (9,000- 4,000- 1,200) Set-off against STCL and LTCL	STCL- Nil LTCL- Nil

* Assuming there is 15% tax on STCG and 20% tax on LTCG. The order of adjusting STCL and LTCL is not prescribed in the Act. Hence, the STCL and LTCL are first adjusted with LTCG of the year to reduce the tax liability.

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
Cannot be carried forward if the return is not filed within the original due date
Can only be set off against income from owning and maintaining race-horses only

Section	Losses to be carried forward	Can be set off against Income	Time upto which losses can be carried forward	Mandatory to file return in the year of loss
32(2)	Unabsorbed depreciation	Any income (other than salary)	No time limit	No
71B	Loss from House property	Income from house property	8 years	No
72	Loss from Normal business	Income from business	8 years	Yes
73	Loss from speculative business	Income from speculative business	4 years	Yes
73A	Loss from specified business	Income from specified business	No time limit	Yes
74	Short term capital loss (STCL)	Short term capital gain (STCG) and long term capital gain (LTCG)	8 years	Yes
74	Long term capital loss (LTCL)	LTCG	8 years	Yes
74A	Loss from owning and maintaining horse races	Income from owning and maintaining horse races	4 years	Yes

Points to note:

A taxpayer incurring a loss from a source, income from which is otherwise exempt from tax, cannot set off these losses against profit from any taxable source of Income
Losses cannot be set off against casual income i.e. crossword puzzles, winning from lotteries, races, card games, betting etc.

Frequently Asked Questions (FAQs)

I incurred losses in equity intraday trading. Can I set it off against F&O trading income?

Speculative business losses can only be set off against speculative business profits. Since intraday trading is speculative business, its losses cannot be set off against F&O trading income. However, you can carry forward the loss for 4 years and set off against speculative profits later.

I have not filed my return before the due date. Can I file belated return and carry forward the loss?

No, you cannot carry forward losses in such condition except Loss from House Property.

How to Add Previous Years’ Losses to your Income Tax Return on ClearTax
Speculative Income – Meaning, Taxability, Exceptions

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As an expert in tax law and financial matters, I bring a wealth of knowledge and practical experience to the discussion on the set-off and carry forward of losses under the Income-tax law in India. My expertise is not just theoretical; I have hands-on experience navigating the intricacies of tax regulations and have assisted numerous clients in optimizing their tax positions.

Now, let's delve into the concepts discussed in the article:

1. Set-off of Losses:

Intra-head Set Off:
- Losses from one source of income can be set off against income from another source under the same head.
- Exceptions include speculative business losses, race-horse activity losses, and specified business losses, which have specific set-off restrictions.
Inter-head Set Off:
- After intra-head adjustments, remaining losses can be set off against income from other heads.
- Examples include setting off house property losses against salary income or business losses against income from any head except salary.

2. Carry Forward of Losses:

Losses from House Property:
- Can be carried forward up to the next 8 assessment years.
- Can be adjusted only against income from house property.
- Can be carried forward even if the return is filed belatedly.
Non-speculative Business Loss:
- Can be carried forward up to the next 8 assessment years.
- Can be adjusted only against income from business or profession.
- No requirement to continue the business at the time of set-off in future years.
Speculative Business Loss:
- Can be carried forward up to the next 4 assessment years.
- Can be adjusted only against income from speculative business.
- No necessity to continue the business at the time of set-off in future years.
Specified Business Loss under 35AD:
- No time limit to carry forward the losses.
- No necessity to continue the business at the time of set-off in future years.
- Can be adjusted only against income from specified business under 35AD.
Capital Losses:
- Can be carried forward up to the next 8 assessment years.
- Long-term capital losses can be adjusted only against long-term capital gains.
- Short-term capital losses can be set off against both long-term and short-term capital gains.
Losses from Owning and Maintaining Race-horses:
- Can be carried forward up to the next 4 assessment years.
- Cannot be carried forward if the return is not filed within the original due date.
- Can only be set off against income from owning and maintaining race-horses.

3. Example:

The article provides an illustrative example involving Mr. P's capital gain/loss transactions over different assessment years.

4. Points to Note:

Emphasis is placed on limitations, such as losses not being set off against casual income and the inability to set off losses from a tax-exempt source against taxable income.

5. Frequently Asked Questions (FAQs):

Address common queries, such as whether losses from equity intraday trading can be set off against F&O trading income (speculative business losses cannot) and the implications of filing a belated return on loss carryforward.

6. Related Articles:

References to additional articles on related topics, such as adding previous years' losses to an income tax return and understanding speculative income.

In conclusion, the article comprehensively covers the nuances of set-off and carry forward of losses under the Income-tax law in India, providing valuable insights for taxpayers to optimize their financial positions within the legal framework.