When your returns from selling capital assets are less than the cost of acquisition and transfer expenses, you incur a capital loss. As it is unfair to charge taxes on losses, the Income Tax Act of India allows you to set off and carry forward losses. This lets you adjust losses against your income in the subsequent assessment years.
The following sections will explain the conditions and procedures to adjust capital losses. Read on.
Depending on the head of income, including capital gains, salary, house property, business and profession or other sources, you can set off your capital losses. Losses from one investment can be set off against gains from another investment to reduce your taxable income.
If you are unable to set off the entire capital loss in a single year, you can also choose to carry forward your losses. You can carry forward both short-term and long-term losses for up to 8 assessment years after the year when you incurred the first loss.
Before you set off and carry forward capital losses, you may want to know the applicable rules.
The process of setting off losses consists of two steps:
Individual taxpayers cannot set off losses under the head ‘capital gains’ against any heads of income. They can set off long-term capital losses only against long-term capital gains. In contrast, they can adjust short-term capital losses against both short-term and long-term capital gains.
Losses under the head ‘house property’ can be set off under other heads of income up to a maximum limit of Rs. 2,00,000 in an assessment year.
If you cannot set off your total losses in a year using the above-mentioned processes, you can carry it forward. According to Section 71B, you can carry forward unabsorbed losses and set them off in the next assessment year.
To carry forward losses to the following year, you will have to file returns of income before the due date u/s 139. You also have to file returns in subsequent years to carry forward losses even if you do not have income for those years.
Losses from business or profession can be carried forward for eight assessment years immediately after the first year when losses were incurred. However, you can set off such losses only under the business/professional head of income. In a similar way, you can set off losses from house property and short-term and long-term capital gains.
Follow the given steps to determine, adjust and carry forward losses:
Step 1: First, you will have to calculate losses under each source of income in an assessment year after claiming exemptions, if any.
Step 2: After this, adjust losses against gains under the same head of income (intra-head adjustment) u/s 70.
Step 3: Calculate the inter-head adjustment u/s 71, wherever applicable for losses not fully set-off by the earlier step.
Step 4: For losses not absorbed by the above steps, you can carry it forward to the next assessment year. You will have to file Income Tax Returns (ITR) to carry forward losses.
Losses carried forward can be set off only against the same head of income, i.e. intra-head adjustment.
The Income Tax Act allows individual taxpayers to set off their losses from one income against gains from another. But before you set off and carry forward losses, be aware of the rules discussed above.
1. What is a speculative business u/s 43(5)?
Section 43(5) defines speculative transactions as the practice of periodically setting contracts for the purchase/sale of any commodity without its actual delivery. The part of a company involved in such speculative transactions is said to operate a speculative business.
2. What is a specified business as per definitions u/s 35AD?
These are certain businesses u/s 35AD eligible to receive special benefits/concessions from the government. Cold chain facilities, slum redevelopment housing businesses, warehousing for agricultural produce and hospitals with over 100 beds are some specified businesses.
3. What are the various losses that businesses can set off?
The following is a list of various losses that a business can set off:
4. Can you carry forward losses when a company/partnership has a change in its constitution?
You cannot carry forward losses when a partnership firm’s ownership changes due to a partner’s retirement or death. This applies to the portion of losses that the outgoing partner incurred. However, this is not applicable for unabsorbed depreciation, family planning expenses or capital expenditure on scientific research.
5. When can anyone but the taxpayer carry forward losses?
The following are some situations where anyone but the assessee can carry forward losses:
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