Provisions related to Set off of losses under various heads of Income during the year in Income Tax Act
Set-off of losses is very important when it comes to calculating taxable income under the Income Tax Act and hence let’s go through section 70 and 71 of the Income Tax Act and discuss how loss can be set off in the year when losses are incurred.
Section 70 of the Income Tax Act:
Section 70 of the Income Tax Act deals with intra head adjustment of losses from different sources i.e. set off of loss under one head of income.
For eg: If a person has short term capital loss it can be set off against long term capital gain income, however long term capital loss cannot be set off against short term capital gain income.
Relevant extract of section 70 of the Act is as under:
“(1) Save as otherwise provided in this Act, where the net result for any assessment year in respect of any source falling under any head of income, other than “Capital gains”, is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head.
(2) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any short-term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset.
(3) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any capital asset (other than a short-term capital asset) is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset not being a short-term capital asset.”
Further, section 71 of the Income Tax Act deals with inter head adjustment of losses:
Inter head adjustment of losses means adjustment of losses of one head of income against income from another head during the year under consideration. Table showing adjustment of income against various head of income is as under wherein it has been mentioned that which loss is allowed to be set off against which nature of income.
Inter head losses:
| Head of losses |
Head of income |
||||
| Salary | Income from House Property | Profit or gain from business and profession | Capital gain | Income From Other sources | |
| Salary | NA | NA | NA | NA | NA |
| Income from House Property | Allowed (Upto 2 lakh) | As discussed above | Allowed (Upto 2 lakh) | Allowed (Upto 2 lakh) | Allowed (Upto 2 lakh) |
| Profit or gain from business and profession | Not Allowed [As per section 71(2A)] | Allowed | As discussed above | Allowed | Allowed |
| Capital gain | Not allowed [As per section 71(3)] | Not allowed [As per section 71(3)] | Not allowed [As per section 71(3)] | As discussed above | Not allowed [As per section 71(3)] |
| Income From Other sources | Allowed* | Allowed* | Allowed* | Allowed* | As discussed above |
*Generally, under Income from other sources there is no loss, however no restriction has been mentioned in the provision to set off such loss against income from other head.
As of now long term capital gain is not allowed to be set off against short term capital gain but now since long term capital gain on shares is also taxable it should be allowed to set off such loss against short term capital gain. Also, although capital gain is a special rate income however it’s loss should be allowed to be set off against other sources of income which is not allowed as of now.
Relevant extract from the provision of section 71 are as under:
“(1) Where in respect of any assessment year the net result of the computation under any head of income, other than “Capital gains”, is a loss and the assessee has no income under the head “Capital gains”, he shall, subject to the provisions of this Chapter, be entitled to have the amount of such loss set off against his income, if any, assessable for that assessment year under any other head.
(2) Where in respect of any assessment year, the net result of the computation under any head of income, other than “Capital gains”, is a loss and the assessee has income assessable under the head “Capital gains”, such loss may, subject to the provisions of this Chapter, be set off against his income, if any, assessable for that assessment year under any head of income including the head “Capital gains” (whether relating to short-term capital assets or any other capital assets).
(2A) Notwithstanding anything contained in sub-section (1) or sub-section (2), where in respect of any assessment year, the net result of the computation under the head “Profits and gains of business or profession” is a loss and the assessee has income assessable under the head “Salaries”, the assessee shall not be entitled to have such loss set off against such income.
(3) Where in respect of any assessment year, the net result of the computation under the head “Capital gains” is a loss and the assessee has income assessable under any other head of income, the assessee shall not be entitled to have such loss set off against income under the other head.
(3A) Notwithstanding anything contained in sub-section (1) or sub-section (2), where in respect of any assessment year, the net result of the computation under the head “Income from house property” is a loss and the assessee has income assessable under any other head of income, the assessee shall not be entitled to set off such loss, to the extent the amount of the loss exceeds two lakh rupees, against income under the other head.
(4) Where the net result of the computation under the head “Income from house property” is a loss, in respect of the assessment years commencing on the 1st day of April, 1995 and the 1st day of April, 1996, such loss shall be first set off under sub-sections (1) and (2) and thereafter the loss referred to in section 71A shall be set off in the relevant assessment year in accordance with the provisions of that section.”
We shall discuss about carry forward and set off of losses in our upcoming post.
Guidance on above article by:
Naman Maloo (C.A., B.Com)
He is currently working as Partner – Direct Tax with a renowned firm in Jaipur having experience in dealing Assessments before Income Tax authority, Tax Audit, International Taxation, Tax planning for NRI, Business planning and consultation.
E-mail: naman.maloo@jainshrimal.in | LinkedIn: Naman Maloo
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