income tax
Understanding the principles of set-off and carry forward of losses is crucial for taxpayers aiming to minimize their tax liabilities. This concept enables deduction of losses from profits within the same financial year as well as their application in subsequent years, offering relief to both individuals and businesses.
Set-off refers to the deduction of losses against any profits within the same financial year, effectively lowering taxable income. Conversely, carry forward of losses allows unadjusted losses from the current financial year to be utilized in future financial years against subsequent income. This provision was designed to assist taxpayers who experience losses in a given year. Essentially, the process involves offsetting losses against the profits for that specific year. Any losses that cannot be accounted for in the current year can be carried forward, subject to certain limitations.
There are two primary types of set offs:
This allows losses from a specific income head to be adjusted against profits from the same head. For instance, a loss incurred in Business “XYZ” can be offset against profits from Business “PQR.”
After performing intra-head adjustments, taxpayers can then proceed to make inter-head adjustments. For instance, a loss under 'Income from House Property' can be set off against 'Income from Salary' (subject to certain limitations). It is important to note that intra-head adjustments must be completed before proceeding to inter-head adjustments.
The following table outlines the relevant sections, types of losses, allowable adjustments, and carry forward periods:
| Section | Loss Under Head | Set Off Against Income in Same AY | Set Off Against Income in Subsequent AY | Carry Forward Period (Years) |
|---|---|---|---|---|
| 71B | House Property | (Restricted to Rs. 2 lakh per annum.) Under the same head and/or any other head | Under the same head | 8 |
| 72 | Business & Profession (Normal) | Under the same head and/or any other head except Salary Income | Under the same head | 8 |
| 73 | Speculative Business | Under the same head | Under the same head | 4 |
| 73A | Specified Business | Under the same head | Under the same head | No Limit |
| 74 | Short Term Capital Loss | Against STCG and LTCG | Against STCG and LTCG | 8 |
| 74 | Long Term Capital Loss | Only against LTCG | Only against LTCG | 8 |
| 74A | Income from Other Sources – Loss from maintaining horse races | Under the same head | Under the same head | 4 |
The provisions for set-off and carry forward of losses provide valuable tax advantages by allowing for necessary adjustments against profits, thus lowering taxable income. By gaining a thorough understanding of intra-head and inter-head set-offs, taxpayers are better equipped to manage their finances and effectively reduce their tax obligations.