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How you can set off losses against taxable income?

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Apart from the financial benefits, securing multiple sources of income has tax advantages in the form of income aggregation and loss set-offs. Provisions on set off and carry forward of losses are contained in Chapter VI of the Income tax Act between sections 70 and 80.

How you can set off losses against taxable income?
Journalism@2021The Income-Tax Act identifies incomes under five heads. It is possible that our earnings during the year could classify under more than one of these -salaries, house property, capital gains, business or profession or income from other sources.
Apart from the financial benefits, securing multiple sources of income has tax advantages in the form of income aggregation and loss set-offs. Provisions on set off and carry forward of losses are contained in Chapter VI of the Income tax Act between sections 70 and 80.
Inter-head adjustments
Losses are not anticipated. But when it occurs, Section 71 provides for an inter-head adjustment which helps in reducing the overall taxable income. If incomes are insufficient for set off, the loss can be carried forward for set off against incomes of subsequent years. This helps in reducing taxable income in those years as well. It is important to note that set off in subsequent years can happen only against incomes within the same head. In other words, inter-head adjustment can be made only in the first year. A loss that has been brought forward from an earlier year must be necessarily adjusted against the income head under which the loss first occurred.
For example: A business loss of Rs 15 lakh that occurred in the year 20-21 can be set off against a Capital gain in that year. Consider scenario 1, when the capital gain is Rs 16 lakh. This can help set off the business loss completely in the first year itself and remaining capital gain of Rs 1 lakh is taxed. Consider scenario 2, when the capital gain is Rs 12 lakh. Here, the gain is wiped off against business loss and the taxpayer is left with no taxable income. Balance Rs 3 lakh which couldn’t be set off can be carried forward. In the year 21-22, this brought forward a loss of Rs 3 lakh must be set off against any income occurring under the head ‘business or profession’ only. Even if there is a taxable income under Capital gains in that year, it cannot be used for setting off the business loss of an earlier year.
Salary Income
It is unlikely that salary could be negative. Therefore, the question of setting off a loss under this head does not arise. A salary income can set off a loss that arises under the head of ‘house property’ up to a maximum of Rs. 2 lakhs.
House property
Rental incomes are taxed under this head. Often, a house owner acquires the property using a housing loan. Loss under this head typically occurs when interest on loan exceeds the rental income. If there are multiple rental incomes from multiple properties, then loss from one property can be set off against income from another property. If the net result under this head is a loss, it can be set off against any other income. . Subsection 3A of section 71 allows an inter-head adjustment for a loss under the ‘house property’ head to the extent of Rs 2 lakh. Any loss beyond this limit can be carried forward for up to 8 consecutive assessment years. Instead of loss, if there is a net income from house property, then it can be used to set off losses under the head “Business or profession’
Business or profession
If there are multiple businesses, then loss from one business can be set off against income from other business. Net loss if any can be set off against any income under the head “House property” or ‘Capital gains”. Any loss that remains, can be carried forward for up to 8 assessment years. This general principle applies for all incomes under this head with a few exceptions:
Loss on speculative business must necessarily be set off against profits from the same business. Further, the loss can be carried forward for only up to 4 assessment years.Let’s take an example of a financial consultant who also trades in stocks. Say he earns an income of Rs 25 lakh through consultancy and incurs a net loss of Rs 5 lakh on intraday trading. Both these incomes would be covered under the head ‘Business or profession’. But intraday trading is a speculation business and therefore the loss of Rs 5 lakh would not be set off against the income from consultancy. Thus, the entire Rs 25 lakhs income from consultancy would be taxable. Loss of Rs 5 lakh would be carried forward for set off against profits from intraday trading in the following year.
Certain ‘specified businesses’ which are listed under section 35AD of the Act have no restriction on the number of years for which their losses can be carried forward. Developing affordable housing projects, operating warehousing and cold chain facilities, are a few examples of such specified businesses. Nevertheless, their losses must be set off against profits from these specified businesses only.
Capital gains
Losses from other heads can be set off against capital gains. But no capital loss can be set off against income under any other head. Within the same head, a short-term capital loss whether for the current year or earlier years can be set off against a long term capital gain. But a long-term capital loss must be set off only against a long-term capital gain. Net losses under this head can be carried forward for up to 8 assessment years.
Income from other sources
Miscellaneous incomes like interest earned on deposits, winnings and prize money are taxed under this head. Losses under this head are unlikely. Losses from other heads can be set off against interest incomes. But no loss can be set off against casual incomes that are earned in the form of winnings or prizes.
The writer is a Chartered Accountant and Director at Insphigher Learning Pvt Ltd. The views expressed are personal

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