Understanding Loss Set Off under the Income Tax Act

The Income Tax Act, 1961, encompasses various facets of income and taxation, one of which is the procedure for dealing with losses under different income heads. Understanding the correct method to set off these losses can have a profound impact on your tax liability. This guide aims to clarify these rules, as outlined under sections 70 to 80 of the Act, and provide a practical illustration to assist in your comprehension.

We know that under the Income Tax Act, 1961, there are five different heads of Gross Total Income, under which income pertaining to head is to be shown. Now the question arise when there is loss under any of the five heads. Whether it can be set off against the same head in which there is a loss or can be set off against any head of Income. During the year there is no income under any head but there is a loos in one head, what to do?

Under the Income Tax Act, section 70 to 80, will give your answer. In the case of any assesse any loss incurred under any head of income, it will be set off against any other head of income during the same assessment year, except following situation.

Set off of loss from one head against income from another:

As per section 71(1) of the Act, where in respect of any assessment year the net result of the computation under any head of income, other than “Capital Gains”, is a loss and the assesse has no income under the head “Capital Gains”, he shall subject to the provisions be entitled to have the amount of such loss set off against his income, if any, assessable for that assessment year under any other head.

Please remember that when an assesse has loss under the head “Capital Gain”, it is to be carried forward and cannot be set off against any other income.

As per section 71(2A) of the Act, where in respect of any assessment year, the net result of the computation under the head “Profits and gains of business or profession” is a loss and the assesse has income assessable under the hear “Salaries”, the assesse shall not be entitled to have such loss set off against such income.

Under this section, please remember that under any circumstances, loss under the head “Profits and gains of business or profession” cannot be set off against the income under the head ”Salaries”

As per section 71(3), of the Act, where in respect of any assessment year, the net result of the computation under the head “Capital Gains” is a loss and the assesse has income assessable under any other head of income, the assesse shall not be entitled to have such loss set off against income under other head.

As per section 71(3A), of the Act, where in respect of any assessment year, the net result of the computation under the head “Income from House Property” is a loss and the assesse has income under any other head of income, the assesse not be entitled to set off of such loss, to the extent the amount of the loss exceeds Rs. 2,00,000  against income under the other head.

As per this section, there is a restriction on set off of loss under the head “Income from house property” is of Rs.2,00,000 only. If there is more loss than Rs. 2,00,000 it is to be carried forward.

Losses in speculation business: (Section 73)

Any loss, computed in respect of a speculation business carried on by the assesse, shall not be set off except against profit and gains, if any, of another speculation business.

The meaning of this section is that, under any circumstances, speculation loss cannot be set off against any head of gross total income. If an assesse is doing two types of speculation business and in one business there is loss while in another there is profit, it can be set off. Income from speculation business is shown under the head “Profits and gains of business or profession” but other business income cannot be set off against loss of speculation business. It is to be carried forward for 4 years only.

During the year 1^st April, 2022 to 31^st March, 2023. Mr. A has following income from difference sources. What will be his taxable income for this year?

Calculation of Taxable Income:

Note: 01. Speculation Loss is to be carried forward up to 8 years and will be set off only against speculative profit.     

Conclusion: Understanding the Income Tax Act’s rules for offsetting losses under various heads of income can aid in more accurate tax calculations and potentially, tax savings. However, these rules can be complex, and it’s crucial to consult with tax professionals or legal advisors to ensure accurate implementation. Remember, accurate tax compliance not only keeps you on the right side of the law but can also optimize your financial planning.