The Income Tax Act allows the Taxpayers under certain Conditions to set off loss against Income hereby reducing the net tax liability. If such loss can not be fully set off, the remaining balance can even be carried forward for set off in the future years. It is necessary for every taxpayers to properly understand and take advantage of the facilities in this regard.
Inter Source Adjustment:
There are five heads of income under which any taxpayer can earn income.
1. Salary
2. House Property
3. Income From Business or Profession
4. Capital Gains and
5. Income from Other sources.
However, a person could suffer losses from other heads of income. Now the first and foremost rule is that loss under on head of income has to be first adjusted against any income from the same head this call Inter Source Adjustment.
Inter Head Adjustment:
Now say after setting off the loss as above, there still remains some balance. This balance loss can then be set off against income from other heads called Inter Head Adjustment. Now, such a loss may be adjusted against salary income or say income from Business if any. There are two exceptions to the rule of Inter Head-Adjustment
Inter Source Adjustment:
There are five heads of income under which any taxpayer can earn income.
1. Salary
2. House Property
3. Income From Business or Profession
4. Capital Gains and
5. Income from Other sources.
However, a person could suffer losses from other heads of income. Now the first and foremost rule is that loss under on head of income has to be first adjusted against any income from the same head this call Inter Source Adjustment.
Inter Head Adjustment:
Now say after setting off the loss as above, there still remains some balance. This balance loss can then be set off against income from other heads called Inter Head Adjustment. Now, such a loss may be adjusted against salary income or say income from Business if any. There are two exceptions to the rule of Inter Head-Adjustment
- Losses under Capital Gains can not be set off against income from any other head.
- Loss from business or profession can not be set off against salary income.
Carry Forward of Losses:
Any Loss that can not be set off either against the same head or under other heads because of inadequacy of income, may be carried forward to be set off against income of the subsequent year. Such a carry forward exercise may be done for 8 Years. After 8 years, if the loss has not yet been fully set off, it has to be written off and cannot be used for tax saving.
The following table encapsulates the above discussion:
Adjustment of Loss under the Head Capital Gains:
The loss under the head of Capital Gains is that they have a boundary i.e. they have to be adjusted against other capital gain income only and other income are not available for the setting off. The second condition in this regard is that long-Term capital loss can only be adjusted against long-term capital gain.
Conclusion:
Lastly, note that for being eligible to carry forward and set-off any loss, it is important to file the Tax Return by the specified due date. If the loss return is submitted after the due dates, the Board may condone the delay only if it is satisfied that it was due to genuine hardship on the part of the taxpayer (Circular No. 8/2011 dated 16.05.2001).
Any Loss that can not be set off either against the same head or under other heads because of inadequacy of income, may be carried forward to be set off against income of the subsequent year. Such a carry forward exercise may be done for 8 Years. After 8 years, if the loss has not yet been fully set off, it has to be written off and cannot be used for tax saving.
The following table encapsulates the above discussion:
| Type of loss to be carried forward to subsequest year(s) | Income against which carried forward loss can be set off in nest year(s) | For who many years loss can be carried forward |
| 1. House Property Loss 2. Business Loss 3. Capital Loss a) Short-Term Capital Loss b) Long Term Capital Loss | Income under the head “ Income from House property Any Business Profift
Any Taxable Income under the head “Capital Gains” Long Term Capital gains only | 8 Yewars
8 Years
8 Years
8 Years
|
Adjustment of Loss under the Head Capital Gains:
The loss under the head of Capital Gains is that they have a boundary i.e. they have to be adjusted against other capital gain income only and other income are not available for the setting off. The second condition in this regard is that long-Term capital loss can only be adjusted against long-term capital gain.
Conclusion:
Lastly, note that for being eligible to carry forward and set-off any loss, it is important to file the Tax Return by the specified due date. If the loss return is submitted after the due dates, the Board may condone the delay only if it is satisfied that it was due to genuine hardship on the part of the taxpayer (Circular No. 8/2011 dated 16.05.2001).
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