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Set off & Carry Forward of Losses
MEANING OF SET-OFF & CARRY FORWARD OF LOSSES
INTRODUCTION Adjustment of Losses against Profits from Another Source/Head
Set off of Loss of Income in Same AY.
Carry Forward of If Losses cannot be Set-off in Same Year due to Inadequacy of
Losses Eligible Profits, then such Losses are carried forward to Next AY
for Adjustment against Eligible Profits of that year.
A. Set off of Loss in Same Year
✓ Intra-Head/Inter-Source Adjustments [Set off within Same
Head of Income]
✓ Inter Head Adjustments [Set off against other Head of Income]
B. Carry Forward & Set off of Loss in Next Year.
A) SET OFF OF LOSSES
1) INTRA HEAD/INTER SOURCE ADJUSTMENT [SECTION 70]
✓ It means loss from one source of income can be set off against income from
another source of income but in the same head of income
Examples:
➢ Loss from one house property can be set off against the Income from another
house property as both these sources of income fall under one head of income.
➢ If the assessee has two house & income from one house is ₹ 30,000 while loss
from other house is ₹ 10,000, then such loss shall be adjusted against other
income from same source & after set off, income u/h HP = ₹ 20000.
➢ Loss from one business (textiles) can be set off against income from any other
business (printing) in same year as both these sources of income fall under
one head of income.
EXCEPTIONS to Intra Head/Inter Source adjustment: In following cases, Loss from one
source cannot be adjusted against Income from another source although both falls under
Same head:
Nature of Loss Details
Speculation Business ✓ Speculative Business Loss CANNOT be set off from Normal
Loss [Sec 73(1)] Business Income (Non- Speculative Business Income).
✓ Speculation Business Loss can be set off against Income of
ANY other Speculation Business only.
✓ However, losses from other business can be adjusted
against profits from speculation business.
Loss of Specified ✓ In case of an assessee exercising the option of shifting out
Business u/s of the default tax regime provided under section
115BAC(1A), loss in any specified business referred in
35AD [Sec
section 35AD can be set-off only against any other
73A(1)] specified business.
✓ However, losses from other business can be set-off against
profits from specified business.
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Loss from Activity ✓ Such loss can be set off only against income from owing &
of Owning & maintaining race horses only
Maintaining Race
Horses [Sec
74A(3)]
Long Term Capital ✓ LTCL can be set off against LTCG only & NOT even against
Loss [Sec 70(3)] STCG.
✓ However, STCL can be set off against both STCG & LTCG.
Loss from ✓ NO SET OFF against any Income. It is Taxable @ 30%.
Lottery, Puzzles, ✓ Expenditure Incurred for Buying Lottery Ticket - Not
Deductible.
Card Games
Exempt Source ✓ Loss from exempt source of Income cannot be set-off against
profits from taxable source.
2) INTER HEAD ADJUSTMENT [SECTION 71]
✓ It means loss under one head of Income can be set off against income from another
head of Income but in the same previous year.
✓ Ex: Mr. X has loss from Business/Profession of Rs. 3,00,000 & Income from House
Property of Rs. 5,00,000. In such case, Loss from business (One head) can be set off
against Income from House Property (Another Head).
EXCEPTIONS to Inter head adjustment:
1 Capital Loss ✓ Loss u/h Capital Gains can be set off against Income u/h
Capital Gains only.
✓ Loss u/h ‘Capital Gains’ CANNOT be set-off against Income
under Any other Head.
✓ Short term capital loss (STCL) can be set off against
STCG/LTCG.
✓ Long Term Capital Loss (LTCL) can be set off against LTCG
2 Loss u/h ✓ Loss u/h PGBP CAN be set off against Income from Any Head of
PGBP Income Except Income from Salary.
3 Loss u/h ✓ The loss under the head “Income from house property” would
‘House not be allowable to be set-off against income under the other
Property’ head if the assessee pays tax at concessional rate u/s 115BAC.
✓ If assessee follows Optional Tax Regime i.e opts to shift out from
Default tax Regime u/s 115BAC, Loss u/h ‘House Property’ can be
set off against any Head upto ₹ 2 Lacs only.
✓ Note: Maximum Loss from House Property which can be set-
off = ₹ 2 lacs.
4 Since Intra-Head Adjustment is NOT Permitted in the following cases &
thus Inter-Head Adjustment is ALSO NOT Permitted
✓ Loss from Speculation Business;
✓ Loss from Specified Business u/s 35AD;
✓ Loss from Activity of owning & Maintaining Race Horses;
✓ Loss of Lottery, Crossword Puzzles, Card Games;
✓ Loss from Exempt Source of Income.
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Notes:
1) Assessee may choose to set off the losses in the manner which is Most Beneficial
to him.
2) It is Mandatory to Set off Loss if Eligible Income is there. Assessee cannot ignore it.
B) CARRY FORWARD OF LOSSES
If Loss cannot be set off either under Same Head or under other Heads of Income due to
Absence of Eligible Income in Same AY, it shall be carried forward to the next year & Set
off against Income from Same Head in next AYs subject to prescribed Time Limit.
Note:
1) Once a Loss is carried forward, it can be set off only against Income from Same Head.
2) Loss from Lottery cannot be set off nor Carried Forward
TREATMENT OF VARIOUS LOSSES IN DETAIL
Loss u/h Combined Provisions of Set off &
Carry Forward
House a) If the assessee exercises the option of shifting out of the default tax
Property regime provided under section 115BAC(1A): In any assessment year,
if there is a loss under the head “Income from house property”, such
[Section 71B]
loss will first be set-off against income from any other head to the
extent of 2,00,000 during the same year. The unabsorbed loss will
be carried forward to the following assessment year to be set-off
against income under the head “Income from house property”.
b) If the assessee pays tax at concessional rate u/s 115BAC: The loss under
the head “Income from house property” would not be allowable to
be set-off against income under any other head. The unabsorbed
loss will be carried forward to the following assessment year to be
set-off against income under the head “Income from house
property”.
✓ Remaining (Unabsorbed) Loss will be carried forward to Next
Year. Time Limit- 8 Years
✓ Such b/f Loss can be set-off against Income u/h ‘House
Property’ only in next PY.
Normal ✓ Firstly, Normal business loss can be set off against income u/h
Business ‘PGBP’.
Loss ✓ If still there is unabsorbed Loss, it can be set off against Income
[Section 72] under any other head Except “salaries”.
✓ If still there is a loss, it can be carried forward to Next Year.
✓ Such b/f Loss can be set-off against ‘income u/h PGBP’ only in
Next PY.
✓ Time limit – 8 years
✓ Person who incurred the loss alone is entitled to carry forward & set-off
the loss: The loss can be carried forward and set off only against the
profits of the assessee who incurred the loss. That is, only the person
who has incurred the loss is entitled to carry forward & set off the
same. Consequently, the successor of a business cannot carry
forward & set off the losses of his predecessor except in the case of
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succession by inheritance.
✓ Unabsorbed Depreciation can be set off against ANY HEAD OF
INCOME.
✓ It is not necessary that Business whose Loss is being set off must be
continued.
Specified ✓ An assessee exercising the option of shifting out of the default
Business tax regime provided under section 115BAC(1A) and carrying
Loss on specified business, can claim deduction u/s 35AD in respect
[Section 73A] of capital expenditure (other than land, goodwill and financial
instruments) incurred in respect of such business, subject to
fulfillment of specified conditions. Any loss computed in
respect of the specified business referred to in section 35AD
can, however, be set off only against profits and gains, if any, of
any other specified business. The unabsorbed loss, if any, will
be carried forward for set off against profits and gains of any
specified business in the following assessment year and so on.
Note: Loss from a specified business can be set-off against Profit
of another specified business u/s 73A even if other specified
business is not eligible for deduction u/s 35AD.
Ex: An assessee can, therefore, set-off the losses of a hospital
or hotel which begins to operate after 1st April, 2010 and
which is eligible for deduction under section 35AD, against the
profits of the existing business of operating a hospital (with
atleast 100 beds for patients) or a hotel (of two-star or above
category), even if the latter is not eligible for deduction under
section 35AD.
Note: Business should be specified, eligibility is not
Inmportant
Time Limit- unlimited
Speculation ✓ Speculation Business Losses can be set off only against any
Business Loss other Speculation Business Income.
[Section 73] ✓ If there is no other Speculation Income, it can be c/f to
subsequent years & set-off only against income from any
speculation business carried on by the assessee.
Note: It is not necessary that same speculation business must
continue in AY in which Loss is to be set off.
Time Limit – 4 Years
Note: Loss from activity of trading in derivatives is not treated
as speculative loss.
Capital Loss ✓ STCL can be set off against both STCG & LTCG.
(Section 74) ✓ LTCL can be set-off only against LTCG & not against STCG.
✓ Carry Forward:
1) STCL: It can be set off against ANY Capital Gains.
2) LTCL: It can be set off ONLY against LTCG.
3) Time Limit – 8 Years for both STCG/LTCG
✓ Capital Loss cannot be set off against Income under any other
Head.
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Owning & ✓ Losses from Activity of owning & Maintaining Race Horses can
Maintaining be set off only against Income from Activity of owning &
Race Horses Maintaining race horses only.
[Sec 74A] ✓ Time Limit- 4 Years
✓ Amount of Loss Incurred by assessee-
➢ In case assessee has no income by way of stake money –
Amount of revenue expenditure incurred by the assessee wholly
& exclusively for the purpose of maintaining race horses.
➢ In case assessee has income by way of stake money - The
amount by which such income by way of stake money falls short
of the amount of revenue expenditure incurred by the assessee
wholly & exclusively for the purpose of maintaining race horses.
i.e., Loss = Stake money – revenue expenditure for the purpose
of maintaining race horses.
➢ Horse Race- A horse race upon which wagering or betting
maybe lawfully made.
➢ Income by way of stake money- The gross amount of prize
money received on a race horse or race horses by the owner
thereof on account of the horse or horses or anyone or more of
the horses winning or being placed second or in any lower
position in horse races.
Unabsorbed ✓ Unabsorbed Depreciation can be set off against any income
Depreciation except salaries.
Section 32(2) ✓ Time Limit – unlimited
SET-OFF OF BROUGHT FORWARD LOSSES & MAXIMUM TIME LIMIT
Nature of Loss to be c/f Income against which Brought Maximum Period for
Forward Loss can be set-off Carry Forward of
Losses
House Property Loss Sec Any Income u/h House 8 AYs
71B Property
Normal Business Loss Any Income u/h PBGP. 8 AYs
Sec 72
Speculation Business Loss Any Speculation Business 4 AYs
Sec 73 Income
Specified Business Loss Any Specified Business Profit Indefinite
Sec 73A Period
Long Term Capital Loss Long Term Capital Gains 8 AYs
Sec 74
Short Term Capital Loss STCG/LTCG 8 AYs
Sec 74
Loss from Activity of Income from Activity of owning 4 AYs
owning & Maintaining & Maintaining Race Horses.
Race Horses Sec 74A
ORDER OF SET-OFF OF LOSSES [SECTION 72(2)
1) Current year Depreciation Sec 32(1)
2) Current years Capital Expenditure on scientific research and current year expenditure on
Family Planning, to the extent allowed.
3) Brought Forward B&P Losss [Sec 72(1)]
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4) Unabsorbed Depreciation [Section 32(2)]
5) Unabsorbed Capital Expenditure on Scientific Research of Earlier Years [Section
35(4)]
6) Unabsorbed Expenditure on Family Planning of Earlier Years [Section 36(1)(ix)].
COMPULSORY FILING OF ROL BEFORE DUE DATE U/S 139(1) [SEC 80]
As per section 80,
✓ business loss under section 72(1),
✓ speculation business loss under section 73(2),
✓ loss from specified business under section 73A(2), in case the assessee exercises
the option of shifting out of the default tax regime provided under section
115BAC(1A),
✓ loss under the head “Capital Gains” under section 74(1) and
✓ loss from activity of owning and maintaining race horses under section 74A(3),
which has not been determined in pursuance of a return filed under section 139(3)
cannot be carried forward and set-off. Thus, the assessee must have filed a return of
loss under section 139(3) in order to carry forward and set off of such losses. Such a
return of loss should be filed within the time allowed under section 139(1).
This condition does not apply to a loss from house property carried forward under
section 71B and unabsorbed depreciation carried forward under section 32(2).
