Set-off of losses means the adjustment of losses against the profits from another source/head of income in the same assessment year. Losses incurred in the relevant year is adjusted against another income in two steps
Intra-head Adjustment and
Inter-head Adjustment
Intra-head adjustment
If there are several sources of income, falling under the same head of income, the loss from one source of income may be set off against the income from another source falling under the same head of income. This is called an intra-head adjustment of losses.
The following restrictions should be kept in mind before making intra-head adjustments of loss:
Long-term capital loss can be set-off only against long-term capital gains. It cannot be set-off against short-term capital gains, though both of them fall under the same head "capital gains".
Any loss from gambling activity, i.e., from lottery, crossword puzzle, races including horse races, card games, gambling or betting, etc., cannot be set-off against income from the same source or any other source and even vice-versa adjustment is not permissible. In other words, these losses are permanent losses which cannot be adjusted against any profit.
Loss from speculative business cannot be set off against any income other than income from speculative business. However, non-speculative business loss can be set off against income from speculative business.
Loss from business specified under section 35AD cannot be set off against any other income except income from the specified business.
Loss from owning and maintaining race horses cannot be set off against any income other than income from the owning and maintaining race horses.
Any loss from the transfer of virtual digital asset made on or after 01-04-2022 cannot be set-off against income from the same source or any other source. Even vice-versa is not possible, i.e., any loss under any head cannot be set-off against income from the transfer of virtual digital asset.
Person opting for concessional taxation regimes of Section 115BA, Section 115BAA, Section 115BAB, Section 115BAC, Section 115BAD or Section 115BAE , as the case may be, is not allowed to set-off and carry forward losses or depreciation which are attributable to specified deductions.
No set-off of any loss, whether brought forward or otherwise, or unabsorbed depreciation is allowed against the undisclosed income detected as a result of:
Search initiated under Section 132;
A requisition made under Section 132A; or
A survey conducted under Section 133A other than under Section 133A(2A)
i) No set-off of any loss is allowed against unexplained income taxable under section 115BBE.
j) Any trust, fund or institution referred to in sub-clause (iv), (v), (vi) and (via) of Section 10(23C) or Section 11 shall not be allowed to set-off any loss against specified income as referred to in Section 115BBI.
Inter-head adjustment
If after setting off the loss from one source against the income of another source falling under the same head, the net result is still a loss, the loss under one head of income may be set off against the income under another head in the same previous year. This is called an inter-head adjustment of losses.
The following restrictions should be kept in mind before making inter-head adjustments:
Before making the inter-head adjustment, the taxpayer has to first make an intra-head adjustment.
Speculative losses cannot be set-off against income taxable under any other head, i.e., salaries, house property, capital gains and other sources. These losses can be set-off only against income from speculative business.
Losses from specified business as referred to in section 35AD cannot be set-off against income taxable under any other head. These losses shall be set-off against income from the specified business only.
Loss under the head “Capital gains" cannot be set off against income under other heads of income.
No loss can be set off against income from winnings from lotteries, crossword puzzles, races including horse races, card games, and any other game of any sort or from gambling or betting of any form or nature and even vice-versa is not possible.
Loss from the activity of owning and maintaining race horses cannot be set-off against any other income. Thus, it can be set-off only against income from same source, i.e., income from the activity of owning and maintaining race horses.
Loss from business and profession cannot be set off against income chargeable to tax under the head “Salaries".
Loss under the head “house property" shall be allowed to be set off against any other head of income only to the extent of Rs. 2,00,000 for any assessment year.
An assessee opting for concessional tax regime under Section 115BAC is not allowed to set-off any loss under the head "Income from house property" with any other head of income.
An assessee opting for concessional taxation regime under Section 115BA, Section 115BAA, Section 115BAB, Section 115BAC, Section 115BAD or Section 115BAE is not allowed to set-off losses or unabsorbed depreciation if such losses or depreciation are attributable to deductions which are not allowed on opting for such concessional tax regimes.
No loss can be set-off against the following incomes:
Undisclosed income found during search/survey [Section 79A];
Income from gambling activities [Section 115BB]
Unexplained income [Section 115BBE];
Income from transfer of virtual digital asset [Section 115BBH];
Specified income of trust or institutions [Section 115BBI]; and
Winnings from online games (if such winnings are from the lottery, crossword puzzle, race, horse race, card game, other game of any sort, gambling or betting) [Section 115BBJ].
Carry forward of losses
If losses cannot be set off in the same year due to inadequacy of eligible profits, then such losses are carried forward to the next assessment year for adjustment against the eligible profits of that year.
Loss under the head house property- If loss under the head “Income from house property" cannot be fully adjusted in the year in which such loss is incurred, then the unadjusted loss can be carried forward to the next year. In the subsequent years(s) such loss can be adjusted only against income chargeable to tax under the head “Income from house property". The losses can be carried forward for 8 Assessment Years immediately following the year for which the loss was first computed.
Loss from Head Business and Profession
Non-speculative loss - If the loss of any business/profession (other than speculative business and specified business) cannot be fully adjusted in the year in which it is incurred, then the unadjusted loss can be carried forward for making adjustments in the next year. In the subsequent year(s) such loss can be adjusted only against income charged to tax under the head “Profits and gains of business or profession". The losses can be carried forward for 8 Assessment Years immediately following the year for which the loss was first computed.
Speculative loss – If the loss of any speculative business cannot be fully adjusted in the year in which it is incurred, then the unadjusted loss can be carried forward for making adjustments in the next year. In the subsequent year(s) such loss can be adjusted only against income from speculative business (may be the same or any other speculative business). Such losses can be carried forward for 4 Assessment Years immediately following the year for which the loss was first computed.
Specified business - Loss from business specified undersection 35ADcannot be set off against any other income except income from the specified business. Such loss can be carried forward for adjustment against income from a specified business for any number of years.
Loss under the head capital gains
If loss under the head “Capital gains" incurred during a year cannot be adjusted in the same year, then the unadjusted capital loss can be carried forward to the next year. In the subsequent year(s), such loss can be adjusted only against income chargeable to tax under the head “Capital gains", however, long-term capital loss can be adjusted only against long-term capital gains. Short-term capital loss can be adjusted against long-term capital gains as well as short-term capital gains. The losses can be carried forward for 8 Assessment Years immediately following the year for which the loss was first computed.
Loss under the head other sources
Loss under the head other sources cannot be carried forward. However, loss from owning and maintaining race horses can be carried forward to set off against income from owning and maintaining race horses. Such loss can be carried forward only for a period of 4 Assessment Years immediately following the year for which the loss was first computed.
It is to be noted that an assessee opting for concessional taxation regime underSection 115BA,Section 115BAA,Section 115BAB,Section 115BAC,Section 115BADorSection 115BAE is not allowed to carry forward losses or unabsorbed depreciation if such losses or depreciation are attributable to deductions which are not allowed on opting for such concessional tax regimes.
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