BackOn carry forward and set-off of losses
Domestic tax laws in India provide relief in the form of set-off and carry forward of losses sustained by an individual, either resident or non-resident, in the course of earning income
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The Indian tax landscape has witnessed a significant transformation with the introduction of a plethora of reforms. The fast-changing developments make it imperative to plan one’s taxes better and, hence, structuring one’s tax affairs is inevitable, especially when the effective tax rate for a taxpayer in India is among the highest in the world. The complex tax statutes necessitate us to be aware of the prevailing provisions and to avail of benefits resulting in any form of tax savings.
While relief in the form of exemptions, deductions, rebates and set-off of losses is available under the domestic tax provisions, this article highlights provisions contained in the chapter ‘set-off or carry forward and set-off’ of losses vis-à-vis individuals.
An individual who may be resident or a non-resident vis-a-vis Indian tax laws may be earning income in various forms from across the world, viz. salary, investments or business income. While a resident is taxed on his global income in India, non-resident taxation will be restricted to income received/deemed to be received or accrued/deemed to be accrued in India. In the course of earning income, it is reasonable for one to incur losses. Hence, domestic tax laws in India provide relief in the form of set-off and carry forward of losses sustained by an individual, either resident or non-resident, in the course of earning income.
While the term set-off of losses would restrict claiming the benefit of losses against income earned in the same/previous year, carry-forward and set-off of losses would enable a person to claim losses as a deduction against a future year’s income. Hence, in the event no eligible income is available for set-off of losses in the year of incurring losses, the said losses are available for being carried forward and set off in future years, subject to conditions prescribed.
Having been introduced to the concept of set-off and carry-forward of losses, it is important to understand the mechanism for claiming such losses while arriving at taxable income. The losses from one head of income may be set off with income under the same head i.e. intra-head set-off or in absence of such income, income under any other head, which is an inter-head set-off. This treatment is possible in the year of incurring the losses to be set off. Once carried forward, losses are available for set-off under intra-heads and not inter-head, with depreciation being treated differently.
To exemplify the above, in the event an individual was to invest in an immovable property, say a house, from borrowed funds, the domestic tax provisions allow the individual to claim a deduction for the interest paid on borrowed funds to acquire such property, as eligible losses not only against income from house property but against other heads of income, except casual income i.e. income from lotteries, horse races, etc., restricted to Rs2 lakh. This would qualify as an inter-head set off in the same year of incurring the losses.
For capital gains, the regulations are more restricted. Capital gains qualify as short-term or long-term gain based on the period of holding the asset. The provision of capital gains stipulates that where the losses incurred are classified as short-term capital losses, the same ought to be set off against short-term or long-term capital gains only. However, long-term capital losses are only eligible to be set off against long-term capital gains.
Certain other losses such as specific losses from other sources of income are eligible to be set off in a restricted manner, i.e. losses from owning and maintaining race horses are eligible to be set off against income from the same source only.
While losses are generally available for set-off inter-head in the year of incurring such losses, other than those specified above, certain categories of losses are restricted to be set off against specified heads of income i.e. losses incurred from business or profession are not available for set-off against salary and casual income. Similarly, losses arising from transactions which are exempt from tax are not available for set-off and carry forward to subsequent years. Likewise, unexplained incomes are further not eligible for setting off losses.
Provisions of clubbing of income which prescribe that income of an individual shall include income of spouse, minor child, etc., shall equally apply to clubbing of losses and such loss shall be available for set-off and carry forward to subsequent years. It is noteworthy that the tax laws mandate filing of the return of income within the prescribed time limit to avail of the benefit of carry forward of losses.
While expectations from individuals are ever increasing vis-à-vis reduction in tax rates/increase in tax slabs, set-off of losses does provide relief to taxpayers.
FAQS
For how many years can losses be carried forward to future years?
Generally, losses can be carried forward for eight years. However, there are certain exceptions. Loss from speculation business and loss incurred from owning and maintaining race horses shall be carried forward for four years only. Further, there is no order prescribed for set-off of losses and unabsorbed depreciation in future years. However, as losses can be carried forward for a limited period of time, it would be beneficial for the assessee to set off such losses first and carry forward unabsorbed depreciation for a longer period as the same has no limit on number of years of carry forward and set-off.
Is set-off of losses optional in nature?
The set-off of losses is not optional. The same shall not be used at the discretion of the assessee. In case the assessee opts not to claim the same in the return of income, the assessing officer may, at the time of assessment proceedings, set off the same and carry forward only the balance losses to future years.
Can a non-resident set off losses incurred outside India against income taxable in India?
A non-resident is taxable in India only for the income earned in India and not for any income earned outside India. Consequently, the losses incurred outside India shall not be available for set off against the taxable income earned in India. However, for a resident, since global income is taxable in India, losses incurred outside India by him may be set off against the taxable income earned in India.
Pallavi Talavlikar, Sameer Shah and Dharmil Bhayani contributed to this article.
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