The Income Tax Act has laid down provisions for losses that occur in business and from different sources.
Setting off and carrying forward are the main terms here that are used to describe these losses under the Income Tax Act.
To have a clear view of all the provisions and restrictions, it is vital to clear the air between setting off and carrying forward, setting off covering or adjusting the losses for different sources under the same slab of income.
Whereas, carrying forward means adjustment of unadjusted losses from a year in subsequent years.
In addition, if the taxpayer has not filed an income tax return under the due date, they are not liable for adjusting these losses and carrying them forward.
To understand the whole concept of Set-Off and Carry Forward of Losses Under Income Tax, ESPECIA has already done its part!
Loss from the exempted source
As there are some exemptions for sources that do not come under Income Tax Act.
But some people think that losses from these sources can be adjusted under the Income Tax Act.
But this is not true! Losses from exempted sources from the Income Tax Act cannot be adjusted with other sources set off from the Income Tax Act.
For example, agricultural activities are not included in income tax. But if a person wants to recover losses from agriculture activities or adjust those losses into other sources of income tax, then it is not possible.
In Other words, losses from agricultural activities cannot be adjusted to other sources.
Intra-head adjustment
If a person had suffered losses in the previous year from any income tax source, it could be adjusted in a particular slab of income tax for the source.
It is important that these losses should occur under the same slab of income. In other words, the e loss that has occurred in a particular slab of income through one source, which can be adjusted with another, should have the same income slab.
For example, losses of two different businesses but from the same slab of income can be adjusted with each other.
Intra-head adjustment of loss restrictions
A few restrictions related to the intra-head adjustment of loss are as follows:
- Intra-head adjustment of non-speculative business loss can be adjusted with loss of speculative business. But the vice versa isn't true. Intra-head adjustments of speculative businesses cannot be adjusted with those of non-speculative businesses. Losses of speculative businesses can be adjusted with each other under the same source of income.
- Income that comes under the slab of long-term capital gain can be used to adjust long-term losses for income tax. Other than that, no other slab can be used to adjust long-term losses. Meanwhile, a short-term capital loss can be adjusted with both long-term and short-term capital gains.
- No losses can be used to set off against any income slab of income tax for any game, lotteries, horse and riding game, or any other gambling.
- The business of maintaining and owning horses can only be used to adjust the losses against the business of maintaining and owning horses.
- Some businesses that are mentioned in 35 AD cannot be adjusted with other businesses that are mentioned in 35 AD.
Inter-head adjustment
The next step after making intra-head adjustments is to make inter-head adjustments.
Adjusting the loss of property under the slab of income or the slab of salary is a common example of inter-head adjustment.
In other words, The loss from a particular slab of income can be adjusted with another slab of income if the person has any.
Inter-head adjustment of loss restrictions
A few restrictions related to the inter-head adjustment of loss are as follows:
- It is necessary to make inter-head adjustments for losses before making inter-head adjustments.
- Losses that are suffered from any kind of speculated business cannot be adjusted with any income slab. However, losses that are suffered from any kind of non-speculative business can be adjusted with the loss from the speculative business income slab.
- Losses that are incurred under capital gains cannot be adjusted in any head of an income slab.
- No losses can be used to set off against any income slab of income tax for any game, lotteries, horse and riding game, or any other gambling.
- The business of maintaining and owning horses can only be used to adjust the losses against the business of maintaining and owning horses.
- Some businesses that are mentioned in 35 AD cannot be adjusted with other businesses that are mentioned in 35 AD.
- Losses occurring from a profession and business can be set off from the income slab known as salary.
- Losses with house property can be adjusted with any slab with an annual income of lakh rupees or more than 2 lakh rupees.
Carry forward
The scenario of clearing the loss and making the adjustments are mentioned. But what if you are unable to adjust the losses?
What if you have made the intra-head and inter-head adjustments, but still, The loss is not cleared? These problems are common.
These types of losses can be carried forward for adjustment in the next year under the category of subsequent year income.
There are different rules as well as regulations mentioned under the income tax act for the clearance of losses that are not adjusted for different salary heads.
Carry forward provisions
Here are the professions mentioned in the Income Tax Act to carry forward unadjusted losses.
- Suppose the loss of any business and profession other than subsequent business failed to be adjusted in a particular year. In that case, it can be adjusted in the next year under the slab profit and gains of business and professional income tax.
- The losses under profit and gains of income tax for businesses and professionals can be adjusted under certain slabs of income only if they occur before the due date of an income tax return. These provisions are mentioned in Section 139 (1).
- Unadjusted losses can be adjusted for up to 8 years immediately after succeeding years of loss occurring.
- The cases of unabsorbed depreciation are not applicable for carry forward of adjustment.
- Some businesses that are mentioned in 35 AD cannot be adjusted with other businesses that are mentioned in 35 AD.
- The carry forward of business mentioned in 35 AD can be adjusted only if they have not passed the income tax return due date.
- The business of maintaining as well as owning horses can only be used to adjust the losses against the business of maintaining and owning horses. The time limit for carrying forward these losses is only 4 years.
- If the loss that had occurred for speculative business is not adjusted in a particular year, then it can be adjusted in the subsequent year. The income that comes under the head of a speculative business can only be used to adjust losses for a speculative business.
- The losses under a speculative business can be adjusted if they occur before the due date of an income tax return. These provisions are mentioned in Section 139 (1).
- These losses can be carried forward as well as adjusted up to 4 years immediately after the succeeding year of occurring loss.
- Unabsorbed depreciation of speculative business losses cannot be adjusted.
- If the losses of house property are not adjusted under the Income Tax slab, then it can be carried forward in the next year. In subsequent years, house property losses can only be adjusted under the income tax slab. The adjustment of these losses can be carried forward up to 8 years immediately after the occurring year.
- The losses under house property can be adjusted if they occur before the due date of an income tax return. These provisions are mentioned in Section 139 (1).
Read More,
Conclusion
No business stands without profit and loss. The income Tax Act mentions some rules and provisions for setting off and carrying forward these losses that occur in business and other aspects in different income slabs.
If these losses are not set off in a particular year, then they can be carried forward in subsequent years.
The taxable income of a particular year can also be reduced by these provisions of carrying forward and setting off mentioned in the Income Tax Act.
The main provisions for the processes include inter-head provisions as well as intra-head provisions.
The rules and restrictions of these provisions are mentioned above and explained in detail by ESPECIA.
FAQs Related to Set-Off and Carry Forward of Losses Under Income Tax
1. What is set off and carry forward of losses in income tax?
Set of as well as carry forward of losses under Income tax and Income Tax Act help to reduce a person's taxable income. This means that losses from one source of a particular income slab can be adjusted for different sources in the same income slab. Carry forward is the process used to adjust the losses that remain unadjusted in the previous year.
2. What are the steps for setting off and carrying forward losses?
The main steps for setting off as well as carrying forward losses include intra-head adjustment and inter-head adjustment. An inter-head adjustment must be the first step taken, and intra-head adjustment is the subsequent step. These steps can be used for setting off and carrying forward the losses that occur in any business or profession, house property, speculative business or non-speculative business, capital or profit gains, and any other specific business.
3. Can we carry forward losses if returns are filed after the due date?
No, we cannot carry forward losses if returns are filed after the due date. In other words, it is necessary to carry forward losses if and only if the returns are filed before the due date.
4. What is set off and carried forward?
The Income Tax Act describes the provisions for set off and carry forward. The provisions of the setting off state that the losses of a particular source can be adjusted with the particular taxable slabs. The carry-forward provisions state that if the loss stays unadjusted, it can be carried forward to be adjusted in a subsequent year.
5. What is the rule of carry forward?
The rules of carrying forward are very simple. The first main rule of carry forward is that it can be done immediately after the year of loss for subsequent years. The second main rule for carry forward includes that it can be done only if the loss has occurred before the due date of an income tax return.
Contact Us for CA Services Online, GST Services, Bookkeeping Services, Expats Tax Services, Virtual Accounting Services,Income tax return Services, ESOP Services in Delhi, Noida, Gurgaon, and all across India: write to us at accounts@especia.co.in. Or Call On :(+91)-9711021268 +91-9310165114
