Set-Off and Carry Forward of Losses: A Guide for FY 2024–25
Profits and losses are inevitable parts of running a business. However, the Indian Income Tax Act offers relief to taxpayers by allowing the set-off and carry forward of losses—providing a smart way to manage tax liabilities effectively.
As we approach the Financial Year 2024–25, understanding these provisions can help individuals and businesses make informed financial decisions and reduce tax burdens.
What is Set-Off of Losses?
Set-off refers to adjusting losses against taxable income in the same financial year to reduce your tax liability. There are two types:
- Intra-head set-off: Adjusting loss against income within the same income head.
- Inter-head set-off: Adjusting loss under one income head against income under another head.
Let’s explore both types in detail.
Intra-Head Set-Off:
Under intra-head set-off, losses from one source of income can be set off against income from another source within the same head of income.
Example:
A business owner incurs a ₹1,00,000 loss from one unit but earns ₹2,00,000 profit from another. The loss can be set off against the profit, reducing taxable business income to ₹1,00,000.
Exceptions:
Some losses are restricted in how they can be adjusted:
- Speculative business losses can only be set off against speculative income.
- Losses from horse racing can only be set off against similar income.
- Long-term capital losses (LTCL) can only be set off against long-term capital gains (LTCG).
- Short-term capital losses (STCL) can be set off against both STCG and LTCG.
- Losses from specified businesses (u/s 35AD) can only be set off against profits from specified businesses.
- Losses from exempt sources, like agricultural income, cannot be set off against taxable income.
Inter-Head Set-Off:
After intra-head adjustments, if losses still remain, they can sometimes be set off against income from other heads in the same year.
Example:
A loss from house property can be set off against income from salary or business.
Losses that Cannot be Set Off Inter-Head:
- Speculative business losses
- Specified business losses (Section 35AD)
- Capital losses (both STCL and LTCL)
- Losses from horse racing
What is Carry Forward of Losses?
If losses cannot be fully set off in the current year, they can be carried forward to future assessment years, subject to conditions and time limits.
Rules for Carrying Forward Losses (FY 2024–25):
Key Points to Remember:
- To carry forward most losses, filing your Income Tax Return on or before the due date under Section 139(1) is mandatory.
- Set-off and carry forward help in strategic tax planning and optimizing tax outgo over multiple financial years.
- Losses from exempt income sources cannot be adjusted against any taxable income.
- The continuity of business is not required to carry forward business or speculative losses.
Conclusion:
The provisions of set-off and carry forward of losses under the Indian Income Tax Act provide significant relief for taxpayers facing losses. By smartly leveraging these rules, individuals and businesses can minimize tax liabilities and manage their finances better across financial years.
However, compliance with filing deadlines is crucial to avail these benefits. It’s always advisable to consult with a tax professional or chartered accountant to make the best use of these provisions in line with current tax regulations.
Disclaimer:
The views shared in this article are for educational purposes only. They are personal opinions of the author and not intended as professional financial or tax advice.
