Set-off of losses means adjustment of losses against the income of that relevant year. Where the losses are not completely set off against income of the same financial year then such losses can be carried forward to the subsequent year or years for set off against income of those years. A set-off of loses could be an intra-head adjustment or an inter-head adjustment.
Set-off of losses from house property is defined U/s 71B of Income Tax Act. The provision under this Section is defined as follows:
For any assessment year where the net result of the computation of the income under the head “Income from house property” is a loss and such loss cannot be or is not wholly set off against the income from any other head of income, so much of the loss as has not been so set-off or where the assessee has no income under any other head, the whole of such loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year and-
The loss under the head “house property” arises mainly for a deduction claimed on account of interest payable on borrowed capital for the construction of the house property or for the acquisition of the same. Where the house property is being acquired or constructed from owner’s fund and no money is borrowed for the acquisition or for the construction of the house property then the question of payment of interest does not arise and hence there will be no deduction for interest on borrowed capital.
When a house property is used as self-occupied then Gross Annual Value (GAV) is taken as ‘Nil’ and If such house property is acquired or constructed with a borrowed capital then the interest payable will only result in a loss. This is generally seen in most of the individual’s case. Such loss is termed as ‘ Loss from House Property’.
In addition to this, the computed loss under the head “House Property” is tax beneficial to the owner of the house property (the taxpayer). This is because the loss from the house property is allowed to be set-off against the income of other heads as well including the income from the head “Salary”. Such a set-off of loss reduces the taxable income of the assessee which ultimately reduces the tax liability.
Let’s see how it works.
Mr. Mahesh owns a house property in Mumbai which is self-occupied and he uses the house property for his residence. The house property is acquired by Mr Mahesh with a home loan from LIC Housing Finance Company Limited. During Financial Year 2020-21, he will be paying EMI of Rupees. 40,524. Where the Principal component is Rs. 1,45,887 and the interest is Rupees. 3,40,401.
Mr Mahesh earns a salary Income of Rupees. 10,00,000 per annum. Apart from this, he also pays his life insurance premium of Rs. 50,000 and deposits a sum of Rupees. 60,000 in his PPF account
Computation of Mr Mahesh tax liability:
|Particulars||Amount (in Rs.)|
|Income from Salary||10,00,000|
|Income from House Property [See workings below]||(-)2,00,000|
|Gross Total Income||8,00,000|
|Less: Deduction u/s 80C
(PPF Rs. 60,000 + LIP Rs. 50,000 + Principal Rs. 1,45,887). Maximum amount is limited to Rs. 1,50,000
|Tax on Rs. 6,50,000||42,500|
|Health & Education Cess @ 4%||1,700|
|Total Tax Payable||44,200|
Note: Computation of Income from House Property
|Particulars||Amount (in Rs.)|
|(a) Gross Annual Value
(in case of self-occupied house property, it is Nil)
|(b) Interest paid/payable on home loan
(Interest paid/payable is Rs. 3,40,401 but for self-occupied house property, the maximum deduction is allowed at Rs. 2,00,000.)
|(c) Income (Loss) from House Property||(-)2,00,000|
Thus, from this illustration, we can see that the loss under the head “House Property” has reduced the total income of Mr Mahesh by Rupees. 2,00,000. This reduction has resulted in a reduced tax liability in the hands of Mr Mahesh.
Therefore, the adjustment of Rupees 2,00,000 (loss from House Property) with salary income is known as ‘set-off’ of Loss from House Property.
|S. No.||Provisions of Set of and Carry Forward of Losses under Income Tax Act, 1961|
|1||Clubbing of Your Income with Income of your Spouse|
|2||Clubbing of income from assets transferred to Son’s Wife|
|3||Clubbing of income from the asset transferred to Spouse|
|4||Clubbing of Income on Revocable Transfer of Asset|
|5||Clubbing of remuneration income of Spouse from a Concern in which other Spouse has Substantial Interest|
|6||Set Off & Carry Forward of Loss under the head House Property|
|7||Clubbing of income of a Minor Child with Income of parent|
|8||Clubbing of Income from Self-acquired Property converted to Joint Family Property & subsequent Partition|
|9||Clubbing of Income from assets transferred to a person for benefit of spouse|
|10||Clubbing of Income from Assets Transferred to a Person for the Benefit of Son’s Wife|
|11||Carry forward & set off of Business Losses other than Speculation Loss|
|12||Set off and Carry Forward of Capital Loss|
|13||Set-off and carry forward of Speculative Business Loss|
|14||Set-off & carry forward of Loss from owning & maintaining racehorses|
|15||Set off and carry forward of losses of Specified Business | Section 73A|