How to Carry Forward Capital Losses, Set Off Rules

No one trade for losses but when they happen one should know the rules to set off the capital losses against the income that you received and / or provisions to carry forward such losses to future years for it's intended benefit.

This document covers

Background
"Set-Off" means
"Carry forwarded Losses" means
What are the Heads of Income?
Adjustments under Set-Off of Losses
Loss Set-Off Possibilities
Carry forward and Set-off
Set-Off / Carry Forward of Losses

1. Background

There are specific provisions in Income-tax Act, 1961 for the set off and carry forward of losses. It is common for a taxpayer to suffer losses et times, and the Income Tax Department permits the taxpayer to adjust those losses against his income with some set of rules. Know more on the applicability, adjustments, Rules, tenure to carry such losses, what income can be set-off against what income head etc.

2. What does the term "Set-Off" means for the taxpayer?

“Set-off” means adjustments of losses against the profit from another source/head of income in the same assessment year(financial year).

3. What does the term "Carry forwarded Losses" means for the taxpayer?

If losses cannot be set-off in the same year due to inadequacy of edible profit, then such losses are carry forward to next assessment year for adjustment against the eligible profit of that year.

The maximum period for which different losses can be carried forward for set-off has been provided in the Act,1961.

4. What are the Heads of Income?

There are 5 heads of income as defined by Income Tax Act,1961

Income from Salaries
Income from House Property
Income from Business/Profession
Income from Capital Gains (Short Term and Long Term)
Income from Other Sources

5. What are the types of adjustments under Set-Off of Losses?

Broadly, there are 2 types of adjustments under Set-Off of Losses

5.1. Intra Head Set-off of Losses

The losses incurred by the taxpayer in one source of income shall be set off against income from any other source under the same head of income.

EXAMPLE :
Mr Ram has 2 house properties i.e., one in Hyderabad and one in Bangalore. He has paying home loan interest of Rs 150000 in respect of Bangalore property, and it is self-occupied. He is getting rental income of Rs 300000 per year from Hyderabad property. He can set off rental income from Hyderabad property from the Loss (Interest Paid) arrived in Bangalore property.

Exceptions for Intra Head set-off of losses: Intra Head set off is not possible in the following cases.

Long Term Capital losses cannot be set off against short term capital gain (even though it is same head). Long term capital losses can be set off against only long-term gain.
Speculation/Specified business Losses cannot be set off against profits/gains from any other business/profession. Speculation/specified business losses can be set off against only Speculation/specified business gains.
Note : Any losses from other business/profession can be adjusted againstprofits from speculation business/specified business.
Losses from race horses cannot be set off against any other sources (even horse races comes under other sources). Losses from horse races can be set off against only profits from race horses.

5.2. Inter Head Adjustments

The losses incurred by the taxpayer under one head of income can be adjusted against any other head of Income.

EXAMPLE:
Mr Krishna is a salaried employee, and he has house property. He is paying home loan interest for the house property which is a loss. Mr Krishna can set off house property loss against his salary income.

Exceptions for Inter Head Adjustments: Inter Head adjustments is not possible in the following cases.

Losses from Capital Gains (Short Term and Long Term) cannot be set off against any other heads of income i.e., Salary, House property, Business/Profession or Other sources
Losses from Business/Profession (Normal Business/Speculation business/Specified business) cannot be set off against the head Salaries.
Losses from House Property can be set off against any other heads of income but the limit of set off is only Rs 2 Lakhs. The loss more than Rs 2 lakhs cannot be set off against any other heads of income.
Speculation losses/Specified business losses/loss from race horses cannot be set off against any other heads of income

NOTE : Loss from an exempt source of income cannot be set off against a taxable source of Income.

Example : Loss from Agriculture cannot be set off against Salary or any other taxable income

6. Loss Set-Off Possibilities

Loss from	Salary	House Property	Non-Speculative Business	Specified Business	Speculative Business	LTCG	STCG	Owning & Maintenance of Race Horses	Others
	Income Categories
House Property Loss	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Business/Profession Loss (Non-Speculative)	No	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Speculative business loss	No	No	No	No	Yes	No	No	No	No
Specified Business loss u/s 35AD	No	No	No	Yes	No	No	No	No	No
Long Term Capital Loss	No	No	No	No	No	Yes	No	No	No
Short Term Capital Loss	No	No	No	No	No	Yes	Yes	No	No
Loss from Owing and Maintenance	No	No	No	No	No	No	No	Yes	No

7. Carry forward and Set-off of brought forward losses

The Taxpayer has a right to carry forward the losses if the losses cannot be set off either under same head or different heads due to insufficient income in the same year. The taxpayer can carry forward the losses and adjust those losses in next year with some restrictions.

However, the loss so carried forward can be set-off only against same head of income, i.e. the benefit of "Inter-Head" adjustment is lost.

Section	Nature of loss to be Carried Forward	Income against which the Brought Forward loss can be set off in subsequent years.	Maximum Permissible Period [from the end of the relevant assessment year] for carry forward of losses
71B	Unabsorbed loss from house property	Income from House Property	8 assessment years
72	Unabsorbed businessloss (non- speculative)	Profit and gains frombusiness or profession(non- speculative)	8 assessment years
73	Loss from speculationbusiness	Income from speculation business	4 assessment years
73A	Loss from specified business under section 35AD	Profit from specified business under section 35AD	Indefinite period
74	Long-term capital loss	Long-term capital gains	8 assessment years
74	Short-term capital loss	Short/Long-term capital gains	8 assessment years
74A	Loss from the activity of owning and maintaining race horses	Income from the activity of owing and maintaining race horses.	4 assessment years

NOTE: If the taxpayer is opting for the New Tax regime, the taxpayer cannot carry forward the loss from house property to Subsequent years

8. Submission of Income Tax Return to Set-Off / Carry Forward of Losses

The taxpayer needs to file his income tax return to carry forward the losses and set off in subsequent years. Non-Filing of Income tax return makes the taxpayer ineligible to carry forward the losses. The following losses cannot be carried forward without filing returns.