While the Income Tax Department is often known for its rigorous tax collection practices, it also provides certain relief measures to taxpayers who incur losses. These measures, known as “Set Off” or “Carry Forward and Set Off” provisions, allow taxpayers to offset their losses against future income, subject to specific conditions and restrictions.
Let’s delve into the intricacies of these provisions and how they apply to different heads of income under the Income Tax Act.
Heads of Income:
Under the Income Tax Act, there are five heads of income:
1. Income under the head Salary
2. Profit or Gains from Business or Profession (PGBP)
3. Income under the head Capital Gains
4. Income under the head House Property
5. Income under the head Other Sources
These heads classify the various types of income earned by taxpayers for the purpose of tax collection. The provisions for set off or carry forward and set off of losses also consider these heads of income.
Set Off or Carry Forward and Set Off of Losses under Different Heads:
1. Set Off or Carry Forward and Set Off of Losses under the head Salary: As losses cannot be incurred under the head Salary, the set off or carry forward of such losses is not possible.
2. Carry Forward and Set Off of Losses under the head Other Sources: Losses under the head Other Sources cannot be carried forward and set off against income from other sources.
Set Off of Losses:
The set off of losses is allowed in two ways:
1. Intra Head Adjustment: This refers to setting off losses within the same head of income. For example, you can set off the loss from a manufacturing business under PGBP against the income from a trading business under PGBP. The Income Tax Act allows all types of intra-head adjustments except in specific cases, such as losses from speculative business not being set off against income from non-speculative business.
2. Inter Head Adjustment: This involves setting off the loss from one head against income from another head. For instance, you can set off the loss under PGBP against the income under Capital Gains. The Income Tax Act permits all types of inter-head adjustments, except in certain scenarios like losses from speculative business not being set off against income from any other head.
Carry Forward and Set Off of Losses:
Losses that cannot be set off either through intra-head or inter-head adjustments can be carried forward to future years, subject to certain conditions and restrictions outlined in the Income Tax Act. However, carry forward and set off of losses under the head Other Sources is not permitted.
To be eligible for carry forward and set off, the taxpayer must file the income tax return on or before the due date, except for losses under the head House Property. Losses under the head House Property can be carried forward even if the return is filed after the due date. However, there are no restrictions on setting off losses if the return is filed after the due date.
Specifics for Different Heads of Income:
1. Losses under the head PGBP: Such losses can be set off against any income, except salary, in the year the loss is incurred. If the loss cannot be set off in the same year, it can be carried forward for up to 8 Assessment Years and set off against PGBP income. In summary, both intra-head and inter-head adjustments are possible in the year the loss is incurred, but only intra-head adjustments are possible in subsequent years.
2. Losses under the head Capital Gains: These losses can be set off or carried forward and set off as follows:
– Long Term Capital Losses can be set off against Long Term Capital Gains.
– Short Term Capital Loss
es can be set off against both Long Term Capital Gains and Short Term Capital Gains.
Any losses that cannot be set off in the year they are incurred can be carried forward for up to 8 Assessment Years.
3. Losses under the head House Property: These losses can be set off against any income in the year they are incurred. If the losses cannot be set off in the same year, they can be carried forward for up to 8 Assessment Years and set off against income under the head House Property. Similar to PGBP losses, both intra-head and inter-head adjustments are possible in the year the loss is incurred, but only intra-head adjustments are possible in subsequent years.
4. Losses from the business of owning and maintaining racehorses and speculative business: These losses can only be set off against income from the same source in the current year and in the year of carry forward. The losses can be carried forward for up to 4 Assessment Years.
5. Losses from businesses specified under Section 35AD: These losses can only be set off against income from businesses specified under Section 35AD. Any losses that cannot be set off can be carried forward indefinitely.
In conclusion, the Income Tax Department allows taxpayers to set off or carry forward and set off their losses, subject to specific conditions and restrictions for each head of income. These provisions provide relief to taxpayers who face losses in their income and help to alleviate their tax burden.
