If you have made a loss then you may get relief from income tax department in the form of income tax reduction. You may offset (adjust) your losses against the gains that you have made to reduce your tax liability.
- Income for an individual falls in the following head for income tax calculation purpose
- Income from house property
- Income from business and profession
- Capital Gains
- Income from other sources
- One may adjust losses against profit to arrive at net income against that head to 0 only. For example if total Short Term Capital Gain is Rs 30,000 and Short Term Capital Loss is Rs 50,000 and there was no other gain or loss of Capital Gain then one may offset only Rs 30,000. The person will need to carry forward loss of Rs 20,000 remaining in Rs 50,000 to next years.
- When a loss is adjusted against profit, it is first adjusted against income from the same source, different sources under the same head and then income under different heads in the current year.
Adjustment of various kind of income
Adjustment of Capital Losses
- Losses in the head Capital gains can be adjusted against Capital gains only.
- Short term Capital Losses can be adjusted against Short term or Long term Capital Gains.
- Long term Capital Loss can be adjusted against Long term Capital Gains only.
- Short term and Long term Capital Gains cannot be offset against salary.
- Losses from investment in Long term Capital assets that are exempt from taxes (Equities, equity funds and balanced funds) cannot be adjusted against Long term or Short term Capital Gains. However, such losses can be adjusted against gains from such investment (e.g. profit on equity held for more than year)
Adjustment of Business and Profession Losses, House Property Losses
- Any loss under Business and Profession or House Property Losses can be adjusted against all heads of income tax except Salaries in the current year.
- House Property has an annual value if house is second house or it is not the residence of the taxpayer. Income from property is determined based on that value and any expenses including loan interest, taxes and maintenance expenses on it.
Adjustment of Speculative activities (e.g. intraday trading) or owning/maintaining racing horses
- Losses from speculative activity and owning/maintaining racing horses can be adjusted only in the head in which it is specified.
- Losses from non-speculative activity can be adjusted from gain in speculative activity.
- Adjustment from casual income such as lottery, crossword puzzle, gambling etc. is fully taxable and cannot be adjusted against any loss or profit.
Carry forward of losses
If a loss cannot be fully adjusted in the current year then the remaining portion of loss can be carried forward and adjusted against income in the same head in next 8 years (except Speculation loss and owning/maintaining racing horses for which losses can be carried forward for next 4 years only).
What can be adjusted?
- Following kind of losses can be carried forward
- House Property Loss
- Business Loss (Losses from business can be carried forward even if business has been discontinued)
- Speculation Loss
- Capital Loss
- Loss on account of owning and maintaining racing horses
- Following losses can be adjusted indefinitely:
- Unadjusted depreciation
- Unadjusted capital expenditure on scientific research
- Unadjusted expenditure on family planning
Restrictions on carry forward of losses
- Previous year losses can be adjusted against income in only that head in which the loss occurred.
- To carry forward losses one must file income tax return by income tax filing due date.
- Turning Losses into Gains
- Set off and Carry forward of Capital Losses
- Set off and Carry Forward of Losses in Income Tax