Set off and Carry Forward of Losses under Income tax Act 1961

If, in any year, the taxpayer has incurred a loss from any source under a particular head of income tax, then he is allowed to adjust such loss against income from any other source falling under the same head. The process of adjustment of loss from a source under a particular head of income against income from another source under the same head of income is called intra-head adjustment, e.g. Adjustment of loss from business A against profit from business B.

Under Section 72 of the Income Tax Act,1961, An Assessee can carry forward Non-speculative business loss up to 8 years immediately succeeding the Assessment Year in which the loss has incurred; then he must file ITR within the due date prescribed under section139 (1) of Income Tax Act 1961

Restrictions for making Intra Head Adjustment

The following restrictions should be kept in mind before making intra-head adjustments of loss:

1) Loss from speculative business cannot be set off against any income other than income from speculative business. However, non-speculative business loss can be set off against income from speculative business.

2) Long-term capital loss cannot be set off against any income other than income from long-term capital gain. However, short-term capital loss can be set off against long-term or short-term capital gain.

3) No loss can be set off against income from winnings from lotteries, crossword puzzles, races including horse races, card games, and any other game of any sort or from gambling or betting of any form or nature.

4) Loss from the business of owning and maintaining racehorses cannot be set off against any income other than income from the business of owning and maintaining racehorses.

5) Loss from business specified under section 35AD cannot be set off against any other income except income from specified business in professional tax registration procedure (section 35AD is applicable in respect of certain specified businesses like setting up a cold chain facility, setting up and operating warehousing facility for storage of agricultural produce, developing and building housing projects, etc.)

Inter Head Adjustment

After making intra-head adjustment (if any) the next step is to make inter-head adjustment. If in any year, the taxpayer has incurred loss under one head of income and is having income under other head of income, then he can adjust the loss from one head against income from other head, E.g., Loss under the head of house property to be adjusted against salary income.

Restrictions to be kept in mind while making inter-head adjustment of loss restrictions should be kept in mind before making inter-head adjustments:

1) Before making the inter-head adjustment, the taxpayer has to first make an intra-head adjustment.

2) Loss from speculative business cannot be set off against any other income. However, non-speculative business loss can be set off against income from speculative business.

3) Loss under head “Capital gains” cannot be set off against income under other heads of income.

4) No loss can be set off against income from winnings from lotteries, crossword puzzles, races including horse races, card games, and any other game of any sort or from gambling or betting of any form or nature.

5) Loss from the business of owning and maintaining racehorses cannot be set off against any other income.

6) Loss from business specified under section 35AD cannot be set off against any other income (section 35AD is applicable in respect of certain specified businesses like setting up a cold chain facility, setting up and operating a warehousing facility for storage of agricultural produce, developing and building housing projects, etc.)

7) Loss from business and profession cannot be set off against income chargeable to tax under the head “Salaries.”