Understanding the set-off and carry-forward rules for losses can significantly reduce your tax burden. The Income Tax Act allows you to offset losses both within the same income category (intra-head) and across different categories (inter-head), offering significant tax-saving opportunities. For individuals engaged in business, earning rental income, or making capital gains, knowing these provisions is crucial for effective tax planning.

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In this guide, we will simplify these rules and help you navigate the complex process of set-off and carry-forward of losses.

What is Set-Off and Carry Forward of Losses?

• Set-Off of Losses: It allows you to reduce your taxable income by offsetting losses from one income source against gains or profits from other sources within the same financial year. This adjustment helps you to reduce your overall tax liability. 

• Carry Forward of Losses: It allows you to extend the benefit of losses to future years if it cannot be fully utilised in the same financial year. This will help you to reduce your tax liability in subsequent years.

Set-Off and Carry Forward of Losses Under Different Income Heads

• House Property Losses: Income from house property can sometimes lead to a loss, especially when deductions like home loan interest are more than the rental income.

• Adjustment of Loss: You can set off loss from house property against income from any other sources, such as salary or business income. 

The set-off is restricted to ₹2 lakh per annum.

• Carry-Forward: If the loss in a year is more than ₹2 lakh, you can carry forward the excess loss for up to next 8 years. 

The loss can be set off only against income from house property in future years.

Example: Rohan earns a rental income of ₹6 lakh but claims home loan interest deductions of ₹8 lakh, resulting in a loss of ₹2 lakh.

Rohan can set off this loss against his salary income for the same year. If the loss were ₹3 lakh, ₹2 lakh could be set off against salary, and the remaining ₹1 lakh would be carried forward to next year to be adjusted against income from house property.

• Business or Professional Losses (other than speculative businesses):

• Adjustment of Loss: You can set off loss from Business or Profession against income from any other sources (except Salary) in the same year.

• Carry-Forward: If your current year losses are not fully adjusted then you can carry forward for up to next 8 years.

The loss can be set off only against income from Business or Profession in future years.

Example: Rohan has an income of ₹1 lakh from house property and incurred a business loss of ₹2 lakh in FY 2023-24. In the next year, he again earned ₹1 lakh from house property and a business profit of ₹1 lakh. How can Rohan set off his losses for optimal tax savings?

In FY 2023-24, Rohan can set off ₹1 lakh of his business loss against his income from house property, leaving a remaining business loss of ₹1 lakh to carry forward. 

In the next year, he can set off the carried-forward business loss of ₹1 lakh against his business profit, resulting in no taxable income from business in FY 2024-25.

• Speculative Business Losses:

• Adjustment of Loss: You can set off loss from speculative business only against income from any other Speculative Business. 

• Carry-Forward: If your current year losses are not fully adjusted then you can carry forward for up to next 4 years.

The loss can be set off only against income from speculative business in future years.

• Specified Business Losses: Certain specified businesses, like cold chain facilities, warehousing, or housing projects, have special rules.
• Adjustment of Loss: You can set off loss from specified business only against income from any other specified business . 
• Carry-Forward: If your current year losses are not fully adjusted then you can carry forward for unlimited years, unlike normal business losses.

• Capital Losses:

• Adjustment of Short-Term Capital Loss: You can set off short-term capital loss against income from the sale of other short-term or long-term capital assets.
• Adjustment of Long-Term Capital Loss: You can set off long-term capital loss only against income from sale of other long-term capital assets.
• Carry-Forward:If your current year losses are not fully adjusted then you can carry forward for up to next 8 years.

Example: Rohan incurs a short-term capital loss of ₹1 lakh from the sale of shares and makes a long-term capital gain of ₹2 lakh from the sale of a property, the loss can be set off against the gain, reducing taxable capital gain to ₹1 lakh.

• Loss from  Owning and Maintaining Race Horses

• Adjustment of Loss: You can set off loss from owning and maintaining race horses only against the same income. 
• Carry-Forward: If your current year losses are not fully adjusted then you can carry forward for up to next 4 years.

The loss can be set off only against income from owning and maintaining race horses in future years.

1. Any other losses: These cannot be carried forward or set off, and therefore should be ignored for tax purposes.

Points to Remember for Filing ITR Correctly

• File ITR on Time: To take advantage of carry-forward provisions, make sure to file your return before the due date under Section 139(1) except for house property losses .

• Type of Loss: Understand the different types of loss such as house property loss, business loss, and capital loss because each loss has specific rules for set off and carry forward.
• Income from Multiple Sources: If you have income from multiple sources under the same head (e.g., multiple properties or businesses), ensure you aggregate losses and profits for accurate set off calculations.
• Priority of Set-Offs: You should prioritise set-offs starting with the highest taxable income to reduce your tax liability effectively when set off is possible across different sources of income.
• Different Treatment of Agricultural Income: If you have agricultural income along with income from other sources, note that the agricultural loss cannot be set off against non-agricultural income. 

Conclusion

By understanding the concept of set-off and carry-forward of losses, you can plan your taxes more effectively and minimise your tax liabilities. Whether managing losses from house property, business, or capital assets, being strategic about adjusting these losses can lead to significant long-term tax benefits. To ensure you fully utilise these benefits, consulting a qualified financial advisor is highly recommended.

To optimise your tax planning, download the 1 Finance app and book a consultation with a qualified financial advisor for a seamless, hassle-free tax planning experience.