Efficient tax planning is a crucial aspect of managing your financial resources effectively. One strategy that can significantly impact your tax liability is the set-off and carry forward of losses. The Income Tax Act in India provides specific provisions for adjusting losses against income from different sources, ultimately helping taxpayers minimize their tax burden. This article delves into the mechanisms and regulations governing loss set-off and carry forward in the Indian tax system.
Under the Income Tax Act, if you incur a loss in a particular source of income, you are allowed to set it off against income from the same source under the same head of income in the same assessment year. For example, if you have a loss in one business and profit in another, you can set off the loss against the profit within the same head of income.
Loss under any source falling under any head of income other than “Capital Gains”, is to be set of against income from any other source under the same head of income in the same assessment year.[Section 70(1)]. Loss relating to short term capital assets is to be set off against gains from long term capital assets and/or gains from any other short term capital assets in the same assessment year [Section 70(2)]. Loss relating to long-term capital asset is to be set off only against gains from any other long term capital assets in the same assessment year [Section 70(3)].
Loss under any source falling under any head of income, other than “Capital Gains”, is to be set off against income from any other source under any other head of income in the same assessment year. [Section 71(1)].
If there is a loss under the head Income from House Property, due to payment of interest on borrowed fund and income under the same head is nil. This loss of interest can be set off against any other income, it may be from salary or business or income from any other source, in the same assessment year.
Where there is income under the head “Capital Gains” and loss under any other head of income, the assesse has option either to set off such loss against under the head “Capital Gains” (whether long term or short term) or not to claim such set off in the same assessment year[Section 71(2)].
Where in respect of any assessment year, the net result of the computation under the head ”Profit and gains of business or profession” is loss and the assesse has income assessable under the head “Salaries”, the assesse shall not be entitled to have such loss set off against salary income[Section 71(2A)].
Carry Forward of Business Losses
Under Section 72, unabsorbed business losses in a previous year can be carried forward set off against income in the subsequent previous year subject to the certain conditions given below:
- Loss arising from business or profession can be carried forward and set off for eight succeeding assessment years; but only against profits and gains from business or profession;
- Where in addition to unabsorbed business loss, there is unabsorbed depreciation, effect should be given to unabsorbed business loss first;
- The loss must have been determined in pursuance of a return filed within the time allowed u/s 139(1) and;
- Loss in speculation business will be treated separately. Such losses can be set off only against speculation profit as provided section 73.
Speculation Loss: Section 73
Speculation loss can be set of in the same year only against the speculation profit. Unabsorbed speculation loss will be carried forward and set off against speculation profit of the subsequent assessment year up to four years[Section 73(4)] It may, however, be noted that loss under any other head of income other than “Capital Gains”, can be set off against the speculation profits in the same assessment year under Section 71.
In respect of speculation business, the assesse has an option as under:
(a) either to first set off the speculation losses carried forward from an earlier year against the speculation profits of the current year and then to set off the current year’s losses from other sources against the remaining part, if any, off the current year’s speculation profits;
(b) or to first set off the current year’s losses from non-speculation business and other sources against the current year’s speculation profits and then to set off the carried forward speculation losses of the earlier years against the remaining part, if any, of the current year’s speculation profits [Vide Circular No 23 dated 12.09.1960]
Loss under the head “Capital Gain”: Section 74
Losses under the head ‘Capital gains’ cannot be set off against income under any other head of income under the same assessment year.[Section 71(3)]. Loss relating to short-term capital asset is to be set off against gain from long term capital assets and/or gains from any other short-term capital assets in the same assessment years [Section 70(2)]. Loss relating to long term capital asset is to be set off only against the gains from any other long term capital assets in the same assessment year [Section 70(3)].
Capital loss short term or long term, which cannot be set off in the same assessment year can be carried forward for set off. Unabsorbed loss relating to short term capital asset is to be carried forward and set off against income from capital gains, both long term and short term[Section 74(1)(a)]. Unabsorbed loss relating to long term capital asset is to be carried forward and set off only against long term capital gains and not against short term capital gains [Section 74(1)(b)]. Unabsorbed loss can be carried forward for eight succeeding assessment years.[Section 74(2)].
Impact of Late Filing on Loss Carry Forward
Section 80 of the Act, provide that, if the return of income is not submitted with in due date u/s 139(3), assesse is not entitled claim carried forward of any loss under any head of income.
Conclusion
Effective tax planning is essential to optimize your financial position and minimize your tax liability. Understanding the provisions for loss set-off and carry forward is a key aspect of this planning. By strategically leveraging these provisions, you can ensure that your losses don’t go to waste and are used to reduce your taxable income effectively. However, it’s crucial to adhere to the prescribed timelines and rules to make the most of these provisions and avoid losing the opportunity to carry forward losses. Always consider seeking professional tax advice to ensure compliance with tax regulations and maximize your tax benefits.
Author Bio
What about MAT effect on Unabsorbed carried forward business losses??