Introduction: Understanding the principles of set off and carry forward of losses is essential for taxpayers seeking to optimize their tax liabilities. This concept allows for the deduction of losses from profits within the same financial year and their utilization in subsequent years, providing relief to individuals and businesses.
Set off and carry forward of losses is very important for any tax payer.
Set off means deducting of losses against any other profits of the same Financial Year i.e. reducing of taxable income by utilizing such losses to save taxes.
Carry forward of losses means unadjusted loss of the current Financial Year carried to subsequent Financial Years to be adjusted against income of subsequent Financial Years.
This concept was introduced to provide relief to the taxpayers who have incurred losses in a particular year. In short, Set-off and carry forward of loss means making adjustments of losses against the profit of that particular year. However, the losses that cannot be set off against income of the same year are carried to subsequent years (with some limitation).
There are two type of set offs :
1. Intra head Set off: Loss from any particular head will be allowed to adjust against profit from the same head of income. Eg. Loss from Business “XYZ” can be set off against profit from Business “PQR”.
2. Inter head Set off: After making Intra head adjustment, tax payer can make Inter head adjustments. Eg. Loss under the head of ‘Income from House Property’ can be set off against ‘Income from Salary’ (subject to limitation). However, before making inter-head adjustment, the taxpayer has to first make intra-head adjustment only.
For better understanding let us understand in a tabular form :
| Section | Loss under the head | Set off against the income in the same AY | Set off against the income in the subsequent AY | Carry forward period (Yrs) |
| 71B | House Property
(Restricted to Rs. 2 lakh per annum.) |
Under the same head and / or under any other head | Under the same head | 8 |
| 72 | Business and Profession (Normal) | Under the same head and / or under any other head except Salary Income | Under the same head | 8 |
| 73 | Speculative Business | Under the same head | Under the same head | 4 |
| 73A | Specified Business | Under the same head | Under the same head | No Limit |
| 74 | Short Term Capital Loss | Against STCG and LTCG | Against STCG and LTCG | 8 |
| 74 | Long Term Capital Loss | Only against LTCG | Only against LTCG | 8 |
| 74A | Income from Other Sources – Loss from owning and maintaining horse races | Under the same head | Under the same head | 4 |
Note :
- Loss from exempt income cannot be set off against the taxable income. Eg. Agriculture Income.
- Losses cannot be set off against casual income. Eg Winning from lotteries, puzzels etc.
Conclusion: Set off and carry forward of losses offer significant tax benefits by allowing adjustments of losses against profits, thereby reducing taxable income. By comprehending the intricacies of intra-head and inter-head set offs, taxpayers can effectively manage their finances and minimize tax burdens.
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