A Comprehensive Guide to Set Off and Carry Forward Strategies for Loss Optimization
From business losses to capital gains, learn how to manage losses for tax efficiency through setting off and carrying forward losses.
Set Off and Carry Forward of Losses under The IT (Income Tax) Act
Set Off and Carry Forward of losses are provisions in the Income Tax that provide relief to taxpayers who may have incurred losses in certain financial activities. This article will explain everything about these laws.
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What is Set Off of Losses?
Set-off losses allow taxpayers to adjust or offset losses against income earned in a particular financial year. The aim is to reduce the impact of losses on taxpayers' overall tax liability.
There are two types of set off losses, as explained below.
Intra-head Set off
A taxpayer can set off losses against income from another source under the same category within a particular income category. For instance,
Business losses can be set off against business income.
Capital losses can be offset towards capital gains.
Intra-head Set off Exceptions
Losses from speculative business activities are not allowed to be set off against non-speculative business income.
Short-term capital losses are usually set off against short-term capital gains, and long-term capital losses against long-term capital gains.
Certain types of losses from owning and maintaining horse races can be set off against income generated from owning and maintaining horse races.
Losses incurred from exempted income can not be adjusted against taxable income.
Specified business losses are only eligible for set-off against profits from the same specified businesses.
Inter-head Set off
In some cases, losses from one category can be set off against income from another category. For instance,
Business losses can be set off against income from other heads, such as salary income.
House property losses may be set off against income from other heads, such as business income.
Inter-head Set off Exceptions
However, the losses below can not be set off against any other income head.
Speculative Business loss
Specified business loss
Capital Losses
Losses from owning and maintaining race-horses
Understanding Carry Forward of Losses
The role of carrying forward losses came into play after some losses were still left by making intra-head and inter-head adjustments.
How Carry Forward of Losses Work?
House Property Losses
Losses under the head “Income From House Property” are not entirely adjusted in the same fiscal year.
Unadjusted losses can be continued for up to 8 years, which are exclusively adjustable against income from house property.
As per Section 139(1), the losses remain eligible for carry forward if the ITR is filed after the due date.
Capital Losses
If the losses in the capital gains are not set off in the year they were incurred, then these can be carried forward for the subsequent 8 assessment years.
Long-term capital losses can be adjusted against long-term capital gains (LTCL), but short-term capital losses (STCL) can be adjusted towards both long-term and short-term capital gains.
To carry forward these losses, the ITR filing must be done on or before the due date under (Section 139(1)).
Speculative Business Loss
Losses from speculative business activities can be carried forward for the next 4 assessment years if not fully adjusted in the year incurred.
They can only be set off against income from a speculative business, and filing the ITR on or before the due date is mandatory.
Continuation of the speculative business is not mandatory for carrying forward losses.
Business Losses Specified Under 35AD
If losses are incurred in a specified business under Section 35AD and are not fully adjusted in the year incurred, they can be carried forward indefinitely (No time limit).
These losses are adjustable only against income from the specified business under Section 35AD.
For carrying forward such losses, the ITR must be filed for the year in which the loss is incurred on or before the due date.
Non-Speculative Business Loss
In the case of losses from non-speculative business activities, they can be carried forward for the next 8 assessment years if not fully adjusted in the year incurred.
These losses can only be set off against income from business or profession.
It's crucial to file the ITR on or before the due date as per section 139(1) for eligibility.
The business continuity from which the loss is incurred is not a prerequisite for carrying forward losses.
Losses From The Business Venture of Owning and Maintaining Race horses
Losses related to owning and maintaining racehorses can be carried forward for the next 4 financial years if not fully absorbed in the preceding year.
These losses can only offset income from owning and maintaining racehorses, contingent on filing the ITR.
Here’s the overview of the carry forward losses working.
Act on the benefits of Set Off and Carry Forward Losses with our Tax experts guidance.
Frequently Asked Questions (FAQs)
What is the main purpose of set off and carry forward of losses?
Set off and carry forward of losses allows taxpayers to reduce the impact of losses on their overall tax liability.
Is it necessary to file income tax returns to carry forward losses?
Yes, income tax return filing is required to carry forward losses. Taxpayers should carefully report and follow the guidelines provided by tax authorities for claiming carry-forward benefits.
Can losses be carried forward if the taxpayer changes the type of business?
Changes in the type of business may impact the eligibility to carry forward losses.
What is Carry Forward of Losses?
Carry forward of losses allows taxpayers to carry forward unadjusted losses to future years to set them off against future profits.
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