Income Tax Return: What are set-off losses and carry-forward losses?

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Jul 21, 2023, 05:30:52 PM IST

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Income Tax Provisions

Profit and loss are part and parcel of a business. Income tax provisions provide rules for setting off losses against income or profits or carrying forward the losses to the next few years. Carrying forward or set-off of losses allows the taxpayer to reduce taxable income in the current year and year in which the losses are carried forward. These provisions are:

Text: Centre for Investment Education and Learning (CIEL)

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Intra-head set off

Loss from one source of income can be set off against profit from another source of income that falls under the same head of income. This means that loss from one business can be set off against profit from another business. However, loss from a speculative business cannot be set off against profit from a non-speculative business. Also, long-term capital loss can be set off only against long-term capital gains. However, short-term capital loss can be set off against long- and short-term capital gains.

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Inter-head set off

The loss of one head of income may be set off against income/profit from another head, in line with IT laws. Loss from house property can be set off against income under any other head. Similarly for loss from business (non-speculative), except income from salary. Speculative business loss, specified business loss, loss from horse racing, or capital losses cannot be set off against any other head of income.

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Carry forward losses

After the above set-offs are made, there could still be unadjusted losses which may be carried forward to future financial years. Carrying forward and set-off off losses is possible for eight subsequent financial years.

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Points to note

Losses cannot be set off against casual income received, such as the lottery. Carrying forward losses is permitted only when a return is filed with the Income Tax Department in time.

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Income Tax Return: What are set-off losses and carry-forward losses? - Income Tax Provisions (2024)

Income Tax Provisions

Intra-head set off

Inter-head set off

Carry forward losses

Points to note