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Set-off and Carry Forward of Losses Notes

Set-off and Carry Forward of Losses

Inter-source set-off of losses under the same head of income (Section 70)

Any loss in respect of one source shall be set-off against income from any other source under the same head of income.

For example,

  • loss from textile business can be set-off against profit from printing business.
  • loss from one house property can be set-off against income from another house property.
  • short-term capital loss (STCL) can be set-off against both STCG and LTCG.

Exceptions:

  1. Loss from speculation business can be set-off only against profits from another speculation business.
  2. Loss from specified business under section 35AD can be set-off only against profits from any other specified business.
  3. Long term capital loss (LTCL) can be set-off only against Long term capital gains (LTCG).
  4. Loss from the activity of owning and maintaining race horses can be set-off only against income from the activity of owning and maintaining race horses.

Inter head adjustment (Section 70)

Loss under one head of income can be set-off against income assessable under any other head of income.

For example, business loss can be set-off against income from house property.

Exceptions:

  1. Loss under the head “Profits and gains of business or profession” cannot be set off against income under the head “Salaries”
  2. Loss under the head “Capital gains” cannot be set-off against income under any other head.
  3. Speculation loss, losses from specified business under section 35AD and loss from the activity of owning and maintaining race horses cannot be set-off against income under any other head.
  4. Loss from house property can be set-off against income under any other head only to the extent of Rs. 2 lakhs. The remaining loss can be carried forward for set-off against income from house property of the succeeding year(s).

Losses which cannot be set-off or carried forward

Loss from gambling, betting, card games etc.

Loss from an exempt source [for example, share of loss of partnership firm cannot be set-off against any other business income]

Maximum period of carry forward of losses & Manner of set-off of brought forward losses

Section Nature of loss to be carried forward Income against which the brought forward loss can be set-off Maximum period [from the end of the relevant assessment year] for carry forward of losses
32(2) Unabsorbed depreciation Income under any head other than salaries Indefinite period
71B Unabsorbed loss from house property Income from house property 8 assessment years
72 Unabsorbed business loss Profits and gains from business or profession 8 assessment years
73 Loss from speculation business Income from any speculation business 4 assessment years
73A Loss from specified business under section 35AD Profit from any specified business Indefinite period
74 Long-term capital loss Long-term capital gains 8 assessment years
Short-term capital loss Short-term/Long-term capital gains 8 assessment years
74A Loss from the activity of owning and maintaining race horses Income from the activity of owning and maintaining race horses. 4 assessment years

Order of set-off of losses

  1. Current year depreciation / Current year capital expenditure on scientific research and current year expenditure on family planning, to the extent allowed.
  2. Brought forward loss from business/profession [Section 72(1)]
  3. Unabsorbed depreciation [Section 32(2)]
  4. Unabsorbed capital expenditure on scientific research [Section 35(4)].
  5. Unabsorbed expenditure on family planning [Section 36(1)(ix)]

Note – As per section 80, filing of loss return under section 139(3) within the due date specified under section 139(1) is mandatory for carry forward of the above losses except loss from house property and unabsorbed depreciation.

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