Set Off and Carry Forward of Loss

When a business or trade occurs, it could result in profit or loss. The trader or businessman can incur losses or enjoy the benefits of gain. But laws of income tax in India give the taxpayers who have incurred losses some advantages.

Set-off and carry forward of loss means making adjustments of losses against the profit of that particular year. However, the losses that cannot be set off against income of the same year are carried to subsequent years. This is the meaning of set-off and carry forward of loss.

Set-off and Carry Forward of loss

This concept was introduced to provide relief to taxpayers who incur losses in a particular financial year. The Set-off and carry forward of loss assist taxpayers to settle the losses they incurred against the income they gained or the profit they made. Sometimes, all the losses do not settle against this year’s profit if the losses are high compared to the gains. In such cases, those losses can be carried forward into the profits of subsequent years.

Set-off and carry forward of loss happens when you calculate your capital gains, and the capital gains appear to be lesser than the cost of acquisition. Set-off and carry forward of loss can be measured by adjusting the gain or loss of that specific year. However, the rule is that the losses from capital gain cannot be set off against income in any other way. It could only be settled with capital gains.

For example, loss from property investment can only be settled against the profit of another property investment. You cannot fix these losses with other income, such as bonds and stocks. This is the set-off and carries forward of losses meaning.

The Rules and Exceptions to inter-source set-off and the carry forward of loss sections

Capital

They can only be settled against long-term capital gain. But the short-term capital losses can be settled against the short-term and long-term capital gains. Hence, short-term capital losses are more flexible in dealing with long-term capital losses. There is an eight-year duration limit for long-term and Short term capital losses.

Normal Business

• The business losses can be carried forward with the previous years’ profits
• The set and carry forward of loss will not occur if it doesn’t fall under the ‘Profits and gains of business and profession’ section
• The loss from business can only be forwarded to 8 following years and not more
• The loss has been incurred as a part of a profession or business
• The loss has not been incurred from businesses that involve speculation
• The off and carry forward of loss will not occur if there is a case of inheritance or succession

Let us discuss the sub-section losses from the speculation business.

Speculative Business

An example of the speculation business is the stock market, trading NFTs and cryptocurrencies. The losses from such enterprises have to be settled against profits from such gains only.

This is because the speculation business is risky, and such risk should be taken with care. If the government took care of such losses, people would not be careful about risky investments. The duration limit for speculation business is four years.

Let us study the sub-section Business under 35 AD’s Loss.

Specified Business

Suppose you incur loss from a Specified business under section 35 AD. In that case, it will not be settled against the profits from any other income other than from income from such specified businesses only. There is no time limit for carrying forward losses.

Other sources

The loss that a person incurred by owning and maintaining the racehorses is also not considered in the off and carry forward of loss. Such losses have to be incurred at personal risk—the duration limit for horse races is four years. 

House property

• Any Loss from the income of house property is given priority to be set off
• They are set off against income from any other heads with respect to certain conditions
• The losses that couldn’t be settled with profits this year are carried forward to subsequent years

This falls under the ‘Income from house property’ section.

Conclusion

The set-off and carry forward of loss is a technique implemented by the government to help taxpayers with losses. Such losses can be settled against profits from the same year and a few subsequent years. Losses from one head can also be resolved with earnings from other categories.

The set-off is of two types: The intra-head set-off and the inter-head set-off. The profits from activities like gambling, card games, horse care, and lotteries are not considered during set off. There is a period beyond which the loss cannot be carried forward.