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Set Off and Carry Forward of Losses – Capital Gains and House Property

This article talks about the complicated matter of set off and carry forward of losses. It explains what set off and carry forward means, and talks about the treatment of the most commonly encountered losses – Capital loss and loss from house property.

We all know we have to pay income tax on any income that we earn or profit that we make.

But what about losses? If we pay the government when we make a profit, shouldn’t the government pay us when we make a loss? That would be wonderful, wouldn’t it?

Well, something like that can happen only in a fantasy world.

But the income tax laws provide for something very similar – you can set off your losses against your profits, and can even carry them forward to subsequent years.

Don’t understand what this means? Here’s a detailed explanation.

 

What is Set Off of Losses?

When you have a loss under one of the heads of income (like income from house property), and for the same year, you also have a profit (or income) under the same or some other head of income, you can reduce your profit / income by the amount of the loss.

This means that your total income also gets reduced by that much, and you end up paying that much lesser income tax!

For example, if you have a loss of Rs. 1 Lakh from the head “income from property”, and you set it off against your “income from salary”, your income for that year gets reduced by Rs. 1 Lakh. Now, if you are in the 30% tax bracket, you would end up saving Rs. 30,000!

(And since money saved is money earned, in effect, its equivalent to getting something back from the department of income tax!)

 

What is Carry Forward of Losses?

If your income / profit is less than your loss, you would not be able to set off the full loss. In such a case, you can carry forward the loss to the next year, so that you can set it off against your income / profit in the subsequent year(s).

Now, the rules around carry forward and set off of losses are relatively complex – not all types of losses can be set off against income from another heads, and there are rules restricting carry forward of losses as well.

Let’s try to understand some most commonly encountered rules – about capital loss and loss from house property – in detail.

 

Basic Rules Regarding Set Off and Carry Forward of Losses

1. A very important rule to remember is that losses that are carried forward have to be set off against income from the same head in the subsequent years – they can not be set off against income from any other head of income.

For example, if you have a loss from house property, you can set it off against income from house property or income from salary in the year of the loss. But if you carry it forward, in the next year, you can set it off only against income from house property.

2. A carried forward loss can be set off against income in subsequent years only if the loss has been declared in the income tax return filed by you.

Additionally, if you have:

  • A loss under the head capital gains, or
  • Speculation business loss, or
  • A loss under the head income from business or profession, or
  • Loss from the activity of owning and maintaining race horses,

You have to file a loss return (or a return of loss) as per section 139 (3) if you want to carry forward the loss to subsequent years.

3. A loss for a particular year can be carried forward only if the income tax return for that year is filed by the due date. The only exception to this rule is loss from house property – this loss can be carried forward even if the IT return is not filed in time.

4. Loss from a source of income which is exempt from income tax (for example, an agricultural loss) can not be set off against income from a taxable source of income.

5. Loss from none of the heads of income can be set off against winnings from lotteries, horse races, gambling, etc. The losses from these can not be set off even against income from lotteries, horse races, gambling, etc!

 

General Steps in Set Off and Carry Forward of Losses

There are three stages or steps involved:

Step 1: Inter source adjustment under the same head of income.

If you have a loss under a particular head of income, you are allowed to set it off against an income from the same head.

For example, a short term capital loss from selling one set of shares can be set off against a short term capital gain from selling another set of shares.

Step 2: Inter head adjustment in the same assessment year. This step is applicable only if it is not possible to set off a loss under Step 1.

For example, a loss from house property can be set off against your income from salary.

Step 3: Carry forward of loss. This step is applicable only if it is not possible to set off a loss under Steps 1 and 2.

 

Set Off and Carry Forward of Capital Losses

Long term capital loss can be set off only against a long term capital gain.

Short term capital loss can be set off against any capital gain – long term or short term.

Both long term and short term capital losses can not be set off against income from any other head of income.

Any capital loss remaining after set off can be carried forward for upto 8 years.

A capital loss for a particular year can be carried forward only if the income tax return for that year is filed by the due date.

 

Set Off and Carry Forward of Losses from House Property

A loss from house property can be set off against income from any other head in the same year.

Any remaining loss can be carried forward for upto 8 years. In these subsequent years, this loss can be set off only against income from house property.

A loss for a particular year can be carried forward even if the income tax return for that year is not filed by the due date.

 

Please also read:

- “Long Term and Short Term Capital Gain – Income Tax Calculation

- “Long Term Capital Gains (LTCG) on Sale of a House – Calculation and Income Tax

- “How to save / avoid Long Term Capital Gain (LTCG) Tax on Sale of a House

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