Set Off and Carry Forward of Losses A.Y.2022-23

Set Off and Carry Forward of Losses (A.Y.2022-23): Whenever you sell any property, share, or mutual fund, you could receive a profit or a loss depending on the circumstances. There are provisions in the income tax act that allow you to adjust capital losses, business losses and other losses against gains in accordance with the provisions of the act. As a result, you will be able to reduce your income tax burden. We will discuss how we can set off the losses with regard to the newest and amended provisions of the Finance Act 2022 in this article.

Intra Head Adjustment of Losses

Basically, it means that loss from one source of income can be set off against income from another source of income, under the same head of income.

For Example, The loss from business A is adjusted against the profit from business B as a result of this adjustment.

Exception:

  • In the case of speculative business losses, only speculative business income can be offset against them.
  • A specified business loss (section 35AD) may be set off against a specified business income (section 35AD).
  • Long-term capital loss (LTCL) can be set off against long-term capital gains.
  • A loss that arises from owning and maintaining race horses can be deducted from the income that is generated from owning and maintaining race horses.
  • It is prohibited to set off a loss against any income earned by way of winnings from lotteries, crossword puzzles, races, horse races, card games, and any other game of any type, or from gambling or betting of any kind.

Inter-Head Adjustment of Losses

The taxpayer may be able to offset a loss incurred under one head of income against income derived from another head but in the same previous year.

Example: Loss under the head of house property to be adjusted against salary income

Exceptions:

  • In the case of speculative business losses, only speculative business income can be offset against them.
  • A specified business loss (section 35AD) may be set off against a specified business income (section 35AD).
  • Long-term capital loss (LTCL) can be set off against long-term capital gains.
  • A loss that arises from owning and maintaining race horses can be deducted from the income that is generated from owning and maintaining race horses.
  • It is prohibited to set off a loss against any income earned by way of winnings from lotteries, crossword puzzles, races, horse races, card games, and any other game of any type, or from gambling or betting of any kind.
  • Short-term capital loss can be set off only against STCG & LTCG. Therefore, you cannot offset a loss under the head “Capital gains” against income under another head.
  • Loss from business cannot be set off against salary
  • If a loss under the head “house property” is incurred in any assessment year, that loss can only be set off against any other head of income to the extent that the loss does not exceed Rs. 2,00,000. (w.e.f. A.Y. 2018-19)

Important Points of Set-off Losses

  • In spite of this, unabsorbed losses should be allowed to be carried forward for set-off in subsequent years in accordance with the provisions of section 71B, if they are not absorbed during the current year.
  • The taxpayer must first make an intra-head adjustment before making an inter-head adjustment.
Head Loss 1st Step to Adjust Loss 2nd Step to Adjust Loss 3rd Step to Adjust Loss
Loss From Salary (Not possible loss from salar) N/A N/A N/A
Loss from House Property Intra Head Adjustment (Means First Adjust from House Property Income) Inter Head Adjustment (Means if there is any loss unadjusted then make inter-head adjustment of loss but max 2 Lakh w.e.f. A.Y.2018-19) Carry Forward (C/F)
Loss from Speculative Business Set off against speculation business income N/A Carry Forward
Loss from Specified Business Set off against specified business income N/A Carry Forward
Loss from other business Intra head adjustment Inter head adjustment except for salary Carry Forward
Short-term Capital Gains Set off against STCG & LTCG N/A Carry Forward
Long-term Capital Gains Set off against LTCG N/A Carry Forward
Loss from Owning & Maintaining Race Horses Set off against the same income N/A Carry Forward
Other Sources Loss Intra head adjustment Inter head adjustment Carry Foward Not Allowed

Carry Forward Losses for Adjustment in Next Years

There are times when the loss remains unadjusted after making intra-head and inter-head adjustments. It is possible to carry forward such unadjusted losses to next year to be credited against the income of the subsequent year(s).

Under the Income Tax Law, different provisions have been formulated for the carry forward of losses under different heads of income under different provisions of the law.

When it comes to carrying forward losses, you should keep in mind that once they are carried forward, they can only be offset against the income from the same head in the following assessment year.

Provisions of Carried Forward Losses

Section Losses to be Carried Forward Brought Forward Losses Set Off Against Time Limit Mandatory Filing of return on time 
71B Loss from House Property Only from House Property Income 8 Years No
72 Business Loss Business Income 8 Years Yes
73 Speculative Business Loss Speculative Business Income 4 Years Yes
73A Specified Business Loss Specified Business Income Unlimited Yes
74 Short-term Capital Loss STCG & LTCG 8 Years Yes
74 Long-term Capital Loss LTCG 8 Years Yes
74A Loss from Owning & Maintaining Race Horses Income from Owning & Maintaining Race Horse 4 Years Yes
32(2) Unabsorbed Depreciation Any Income Other Than Salary Unlimited No

Important Points of Carry Forward of Losses

  • Losses can never be adjusted anywhere when the income is exempt from tax.
  • It is not possible to set off and carry forward any losses that have been incurred during the course of lottery play, card games, races, etc.
  • Losses that have been carried forward from a business can be set off even if the business does not continue to run.
  • It is not permissible to set off losses against unexplained income, investments, money, etc.. (u/s 68/69/69A/69B/69C/69D)

Explanation Related to Stock Market

Business Types Explanation Deals in Stock Market: To understand how to set off and carry forward stock market losses, we must first understand the types of business transactions. Afterwards, we can set off and carry forward losses incurred in the stock market.

Transaction Business Type
When Delivery of Shares Taken Profit and Gains from Business & Profession (If shares held as stock in trade)
Capital Gains (If shares held as Capital Asset)
Intraday Always Speculative Business Income
Derivative (Futures/Options), Currency Futures Normal Business Income
Mutual Funds Detail Here (Mutual Funds Taxation)

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