Set-Off and Carry Forward of Losses: A Comprehensive Guide (2024)

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Updated on: 18 Apr, 2024 03:09 PM

Profits and losses are integral parts of any business. Set off and carry forward of losses is a way provided under income tax which taxpayers can use to reduce their taxable income. As the financial year 2023-24 approaches, understanding the regulations of set-off and carry forward of losses can help make well-informed financial decisions. Delve into the intricacies of set-off and carry-forward losses in India for the FY 2023-24.

Contents

  • What is Set Off of Losses?
  • Intra-Head Set Off of Losses
  • Inter-head Set off of Losses
  • What is Carry forward of losses?
  • Income Tax Return Filing
  • Frequently Asked Questions

What is Set Off of Losses?

Set-off loss means deducting the losses against any other profits of the same financial year. In other words, reducing the taxable Income against such losses saves taxes. Even If losses are not set off against income or profits in the same year in which losses were incurred, they can be carried forward to the future assessment years (with some limitation and set off against income of subsequent years).A set-off could be an intra-head set-off or an inter-head set-off.

  • Intra-head set off
  • Inter-head set off

Intra-Head Set Off of Losses

Intra-Head Set Off of Loss allows taxpayers to set off losses from income from one source against income from another source under the same head of income. For example, if a taxpayer has a business loss from one source of income, they can set it off against the profit from another business source of income under the same head.

Exceptions to Intra-head set off

  • Losses from the speculative business can only be set off against the income from the speculative business. And cannot be set off against income from any other businesses.
  • Losses from owning and maintaining horse races can be set off against income from owning and maintaining horse races.
  • Long-term capital losses can only be set off against long-term capital gains.
  • Short-term capital losses can be set off against long-term and short-term capital gains.
  • Losses from the specified business can only be set off against profit from the specified business. However, losses from other professions and businesses can be set off against profit and income from specified businesses.
  • Loss from the exempted source of income cannot be adjusted against taxable income, E.g., Agricultural income is exempt from tax; hence, if the taxpayer incurs a loss from agricultural activity, then such loss cannot be adjusted against any other taxable income

Inter-head Set off of Losses

After adjusting the Intra-head set-off losses, the remaining losses can be set off against income from another head within the same financial year. For example, losses incurred from house property can be set off against income from salary. However, Speculative Business loss, Specified business loss, Capital Losses, and Losses from owning and maintaining racehorses cannot be set off against any other head of profit and income.

What is Carry forward of losses?

After adjusting the Intra-head set-off and inter-head set-off against the income of the same financial year, there could still be some losses remaining, or there is not enough income or profit to adjust the losses in that particular financial year. Losses can be carried forward to the future assessment years and set off against the income of those years.

Rules to carry forward losses:

  • Losses under Income from house property
    If losses under house property are not fully adjusted in the same financial year in which losses were incurred, they can be carried forward to the next 8 years. Such losses can be adjusted only against income from house property and can be carried forward even though ITR is filed after the due date {Section 139(1)}.
  • Losses from Non-speculative Business
    If losses under business or profession (Non-speculative business) are not fully adjusted in the same financial year in which losses were incurred, they can be carried forward to the next 8 assessment years. Such losses can be adjusted only against income from business or profession and can only be carried forward if the ITR is filed on or before the due date as per {Section 139(1)}. It is not necessary that the business from which such loss is incurred should be in continuance to carry forward losses.
  • Losses from speculative business
    If losses under speculative business are not fully adjusted in the same financial year in which losses were incurred, they can be carried forward to the next 4 assessment years. Such losses can be adjusted only against income from the speculative business and can only be carried forward if the ITR is filed on or before the due date {Section 139(1)}. It is not necessary that the business from which such loss is incurred should be in continuance to carry forward losses.
  • Losses under specified Business (35AD)
    If losses under specified business are not fully adjusted in the financial year in which losses were incurred, they can be carried forward to infinite numbers of years. Such losses can be adjusted only against income from the specified business under 35AD and can only be carried forward if the ITR is filed on or before the due date {Section 139(1)}.
  • Losses from capital gain
    • If not fully adjusted in the financial year in which losses were incurred, capital losses can be carried forward to the next 8 assessment years.
    • Long-term capital losses can only be adjusted against income from the LTCG. i.e., Long term capital gains.
    • Short-term capital losses can be adjusted against both LTCG and STCG, i.e., Long term capital gains and Short-term capital gains.
    • It can only be carried forward if the ITR is filed on or before the due date {Section 139(1)}.
  • Losses from owning and maintaining racehorses
    Losses under racehorses can be carried forward for the next 4 financial years if not fully adjusted in the previous year in which losses were incurred. Such losses can be adjusted against income from owning and maintaining racehorses and can only be carried forward if the ITR is filed on or before the due date {Section 139(1)}.
SectionLosses can be carried forwardSet off against Income fromTime limitation for carry forward
71BLoss from House propertyHouse property8 Years
72Business and professionBusiness and profession8 Years
73Loss from speculative businessSpeculative business4 Years
73ALoss from specified businessSpecified businessNo time limit
74Short term capital lossShort term capital gain and Long term capital Gain8 Years
74Long term capital lossLong term capital Gain8 Years
74ALoss from owning and maintaining horse racesOwning and maintaining horse races4 Years

Income Tax Return Filing

The income tax department mandates that losses for a given year cannot be carried forward unless the return for that year is filed before the due date. The last date to file ITR for FY 2023-24 (AY 2024-25) i 31st July 2024. You can file an ITR with Tax2win tax experts easily by connecting with them here.

Even if your return reflects losses with no income to show, filing before the due date is essential. By doing so, you not only adhere to legal requirements but also preserve the option to carry forward those losses for future tax years. This proactive approach helps you maintain accurate financial records and potentially offset future taxable income, ultimately optimizing your tax position.

Remember, filing your return on time is not just about fulfilling an obligation; it's a strategic move to safeguard your financial interests and maximize opportunities for tax efficiency. So, whether you're reporting gains or losses, prioritize timely filing to stay on top of your tax obligations and pave the way for future financial success. https://tax2win.in/efile-income-tax-return

Frequently Asked Questions

Q- Can we carry forward losses without set off?

Losses not set off against income in the current year can be carried forward to the subsequent years against the same heads of Income of future years.

Q- Which loss Cannot be carried forward?

Losses can only be carried forward if the income tax return for that financial year in which losses are incurred is filed on and before the due date as per section 139(1). In the case of house property, losses can be carried forward even if the income tax return is filed after the due date.

Q- Can we carry forward the loss without an audit?

In general, an audit is not required to carry forward losses from house property and capital gain. Exceptions to these cases are losses from trading in securities and business income if a person falls and qualifies to get his account audited in other Income tax law provisions. (i.e. Turnover exceeds the specified threshold Limit.)

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Set-Off and Carry Forward of Losses: A Comprehensive Guide (2024)

FAQs

What are the rules of set off and carry forward of losses? ›

Set off of losses means adjusting the losses against the profit or income of that particular year. Losses that are not set off against income in the same year can be carried forward to the subsequent years for set off against income of those years. A set-off could be an intra-head set-off or an inter-head set-off.

What is the rule for carry forward losses? ›

A loss carryforward allows a business to carryover a loss to the net operating income to reduce its tax liability. This loss can be carried forward over the next 20 subsequent years. By contrast, a loss carryback allows a firm to apply a loss to a previous year's tax return.

Can I use more than $3000 capital loss carryover? ›

Capital losses that exceed capital gains in a year may be used to offset capital gains or as a deduction against ordinary income up to $3,000 in any one tax year. Net capital losses in excess of $3,000 can be carried forward indefinitely until the amount is exhausted.

How many years losses can be carried forward? ›

Carry Forward of Losses

Fortunately, if you are not able to set off your entire capital loss in the same year, both short-term and long-term loss can be carried forward for 8 assessment years immediately following the assessment year in which the loss was first computed.

Which losses Cannot be carried forward? ›

Speculative business loss, specified business loss, loss from horse racing or capital losses cannot be set off against any other head of income. financial years. Carry forward and set-off of losses is possible for eight subsequent financial years.

How much capital gains can I offset with losses? ›

You can use capital losses to offset capital gains during a tax year, allowing you to remove some income from your tax return. You can use a capital loss to offset ordinary income up to $3,000 per year If you don't have capital gains to offset the loss.

What is the 80% NOL rule? ›

What is the 80% NOL rule? The 80% NOL rule was introduced by the Tax Cuts and Jobs Act (TCJA) of 2017 and limits net operating loss carryforwards to 80% of each subsequent year's net income.

How much capital loss can you claim per year? ›

The IRS limits your net loss to $3,000 (for individuals and married filing jointly) or $1,500 (for married filing separately). Any unused capital losses are rolled over to future years.

How is carry forward calculated? ›

Calculate the pension input amounts for the three carry forward years. Subtract the pension input amounts for the earliest carry forward year (2021/22). Subtract the pension input amounts from the annual allowance; the answer is the amount that can be carried forward for that year.

Why can I only claim 3000 capital losses? ›

The IRS allows investors to deduct up to $3,000 in capital losses per year. The $3,000 loss limit is the amount that can be offset against ordinary income. Above $3,000 is where things can get complicated. The $3,000 loss limit rule can be found in IRC Section 1211(b).

What is an example of a capital loss carryforward? ›

For example, if your net capital loss in 2023 was $7,000, you're filing as single, and you don't have capital gains to offset the losses, you could: Deduct $3,000 of the loss in tax year 2023. Deduct $3,000 in tax year 2024. Deduct the remaining $1,000 in tax year 2025.

Can capital losses offset ordinary income? ›

Capital losses can indeed offset ordinary income, providing a potential tax advantage for investors. The Internal Revenue Service (IRS) allows investors to use capital losses to offset up to $3,000 in ordinary income per year.

What happens to carry forward losses at death? ›

However, when you die, any capital loss carryover is lost. It cannot be utilized by your estate or surviving spouse except in the final tax return filed for the year that you die. Therefore, it's important to use as much of the remaining deduction as possible in the final year (or in the years prior to death).

What happens to capital loss carryover at death of spouse? ›

Capital Loss Carryovers

If the decedent, then the loss is only available on the final income tax return. If the surviving spouse, then the loss can be carried forward to subsequent income tax returns.

Does a capital loss reduce taxable income? ›

And while selling an asset at a loss may not seem ideal, it can benefit you at tax time. Besides lowering your taxable income, a capital loss may also help you snag a deduction. A financial advisor can help you optimize a tax strategy to reach your investing goals.

How can I deduct more than 3000 capital losses? ›

Limit on the deduction and carryover of losses

If your net capital loss is more than this limit, you can carry the loss forward to later years. You may use the Capital Loss Carryover Worksheet found in Publication 550 or in the Instructions for Schedule D (Form 1040)PDF to figure the amount you can carry forward.

Is it mandatory to set off brought forward losses? ›

Carrying forward and set-off off losses is possible for eight subsequent financial years. 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.

Do I have to use a capital loss carryforward even if I have no taxable income? ›

You may be able to carry over your full capital loss even though a $3,000 deduction is allowed. You're allowed to deduct capital loss up to the amount of your capital gain plus $3,000, with any unused loss carried over to the next year.

What is carry forward and set off of losses under section 79? ›

According to Section 79, if there is a change in the shareholding of a company by more than 51% in a financial year, any loss incurred in the previous years can only be carried forward and set off against income in the future years if the business or profession of the company is continued with the same shareholding ...

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