Set Off and Carry Forward Of Losses - Income Tax Notes Part - 07
Steps to be applied for set-off and carry forward
The process of setting off of losses and their carry forward is covered in the following three steps:
Step 1: Inter-source (Intra-head) adjustment under the same head of income.
Step 2: Inter-head adjustment in the same assessment year (Step 2 is applied only if a loss cannot be set off under step 1).
Step 3: Carry forward of a loss (Step 3 is applied only if a loss cannot be set off under step 1 and 2).
Inter-source (Intra head) adjustment
If the net result for any assessment year, in respect of any source under any head of income, is a loss, the assessee can set-off this loss against his income from any other source under the same head of income for the same assessment year subject to the following provisions –
House property
Loss from a house property can be set-off against profits of other house properties.
Profits and gains from business or profession Speculation business:
Loss in a speculation business can be set off only against the profit in a speculation business.
Specified business under section 35AD:
Loss of any specified business under section 35AD can be set-off only against profits of any specified business under section 35AD.
Non-speculation business:
Loss from a non-speculative business (including depreciation) can be set off against income from speculative business, non-speculation business as well as against specified business under section 35AD.
Capital gains
Long-term capital loss can be set off only against long-term capital gain. However, shortterm capital loss can be set off against STCG as well as LTCG.
Income from other sources
Activity of owning and maintaining race horses:
Losses from the activity of owning and maintaining race horses can be set-off only against the business profits of owning and maintaining race horses.
Casual income:
1. Expenses incurred while earning casual incomes (i.e., lotteries, crossword puzzles, etc.) are not allowed to be adjusted even against casual incomes. For example, if expense of Rs. 2,000 is incurred in purchasing a lottery ticket and later on, Rs. 1,00,000 prize of lottery is earned, the assessee has to show Rs. 1,00,000 as lottery income (Rs. 2,000 expenses on purchasing lottery ticket is of no consideration).
2. Losses of gambling nature cannot be set off against winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature.
Other incomes:
Losses under the head “Income from other sources” (excluding income from the activity of owning and maintaining race horses and gambling incomes) can be set-off against the income from the activity of owning and maintaining race horses as well as other incomes under the head “Income from other sources” but not against gambling incomes.
Inter-head adjustment
Where the net result of computation made for any assessment year in respect of any head of income is a loss, the same can be set off against the income from other heads subject to the following provisions:
House property
Loss under the head “Income from house property” can be set off against income of any head except gambling incomes (i.e., it can be set off against salary, business or profession, capital gains, and income from other sources) but only up to Rs. 2,00,000 per year. However, there is no restriction on the amount for carried forward house property losses of earlier years.
Profits and gains from business or profession
Speculation business:
Inter-head adjustment is not allowed in speculation business loss.
Specified business under section 35AD:
Inter-head adjustment is not allowed in specified business loss covered under section 35AD.
Non-speculation business:
Loss from a non-speculative business (including depreciation) can be set off against income of any head except salary and gambling incomes (i.e., it can be set off against house property, capital gains and income from other sources).
Capital gains
Inter-head adjustment is not allowed in capital loss.
Income from other sources
Activity of owning and maintaining race horses: Inter-head adjustment is not allowed in case of losses from the activity of owning and maintaining race horses.
Casual income: Neither inter-head adjustment nor intra-head adjustment is allowed in case of losses of gambling nature viz., lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature.
Other incomes: Losses (not being from the activity of owning and maintaining race horses or gambling nature) can be set off against income of any other head except gambling incomes (i.e., it can be set off against salary, house property, business or profession and capital gains).
Carry forward and set-off of losses
If a loss cannot be set off either under the same head or under the different heads, because of absence or inadequacy of the income of the same year, it may be carried forward and set off against the income of the subsequent year. Under the Act, the following losses can be carried forward:
1. Loss under the head “House property”
2. Loss under the head “Profits and gains of business or profession” whether speculative or non-speculative or from specified business under section 35AD
3. Loss under the head “Capital gains”
4. Loss from the activity of owning and maintaining race horses
Following are provisions related to carry-forward and set-off of losses of earlier years:
| | | |
| House property loss | Income under the head “House property” | 8 years |
| Speculation loss Non-speculative business loss: 1. On account of unabsorbed depreciation, capital expenditure on scientific research and family planning | Speculation profits Any income except salaries | 4 years No time-limit |
| 2. Loss from a specified business under section 35AD 3. Other remaining business loss | Income from a specified business under section 35AD Any business profit (whether from speculation or otherwise) | No time-limit 8 years |
| Capital loss: 1. Short-term capital loss 2. Long-term capital loss | STCG as well as LTCG Long-term capital gains | 8 years 8 years |
| Loss from the activity of owning and maintaining race horses | Income from the activity of owning and maintaining race horses | 4 years |
Note:
Losses under the head “Income from other sources” cannot be carried forward to the next year except loss from the activity of owning and maintain race horses.
DEDUCTIONS FROM GROSS TOTAL INCOME
Certain investments or deposits [Sec. 80C]
1. Deduction under section 80C is available only to an individual or a Hindu undivided family.
2. Deduction is available on the basis of specified investments/ contributions/ deposits/ payments made by the assessee during the previous year. However, investment in Indira Vikas Patra, Kisan Vikas Patra and National Relief Bonds are not eligible for deduction under section 80C.
3. Deduction is available on actual payment basis. Payment made during the previous year is qualified for deduction under section 80C, regardless of the fact whether the payment relate to the previous year or preceding years or subsequent years.
4. The maximum amount deductible under sections 80C, 80CCC and 80CCD(1) [i.e., contribution by an employee (or any other individual) toward national pension scheme] cannot exceed Rs. 1,50,000. However, employer’s contribution towards NPS (to the extent of 10 per cent of salary) [Sec. 80CCD(2)] shall not be considered for ceiling of Rs. 1,50,000.
Following are eligible investment under this section:
1. Life insurance premium [subject to a maximum of 20% of sum assured/ or 10% of sum assured] (if policy is issued before April 1, 2012, 20% and if policy is issued on or after April 1, 2012, 10% ).
Note:
In the case of individual, policy should be taken on his own life, life of the spouse or any child (child may be dependent/ independent, male/ female, minor/ major or married/ unmarried). In the case of a Hindu undivided family, policy may be taken on the life of any member of the family.
Note:
Minimum period of holding in this case is 2 years.
2. Contribution (not being repayment of loan) towards statutory provident fund (SPF) and recognized provident fund (RPF).
3. Contribution (not being repayment of loan) towards 15-year public provident fund (PPF).
4. Contribution towards an approved superannuation fund.
5. Subscription to National Savings Certificates, VIII Issue or IX issue or Sukanya Samriddhi Account.
6. Contribution for participating in the unit-linked insurance plan (ULIP) of Unit Trust of India.
Note:
Minimum period of holding is 5 years.
7. Contribution for participating in the unit-linked insurance plan (ULIP) of LIC Mutual Fund (i.e., formally known as Dhanraksha plan of LIC Mutual Fund).
Note:
Minimum period of holding is 5 years.
8. Payment for notified annuity plan of LIC (i.e., New Jeevan Dhara, New Jeevan Akshay) or any other insurer.
9. Subscription towards notified units of Mutual Fund or UTI.
10. Contribution to notified pension fund set up by Mutual Fund or UTI (i.e., Retirement Benefit Pension Fund of UTI).
Contribution to certain Pension Fund [Sec. 80CCC]
This deduction is available to an individual for contribution towards Pension Fund. Amount should be paid or deposited under an annuity plan of the LIC of India or any other insurer for receiving pension. Amount should be paid or deposited out of income chargeable to tax. Maximum limit is Rs. 1,50,000.
Tax treatment of pension:
1. If deduction is claimed under section 80CCC and later on pension is received by the assessee (or his nominee), such pension will be taxable in the hands of recipients in the year of receipt.
2. Where (after claiming deduction under section 80CCC) the assessee or his nominee surrenders the annuity before maturity date of such annuity, the surrender value shall be taxable in the hands of the assessee or his nominee, as the case may be, in the year of the receipt.
Health insurance premium [Sec. 80D]
This section is available for individuals and HUF regarding medical insurance premia (payment should not be in cash).
Individual for this purpose, includes assessee himself, spouse, dependent children and parents (whether dependent or not). In case of HUF, members of HUF are covered.
In the case of individual (not HUF), deduction is available for the following also:
a. If payment is made to the Central Government Health Scheme (CGHS) or any scheme notified by the Central Government (payment not by cash) [This is not available to parents]; or/ and
b. Payment on account of preventive health check-up (*payment by any mode including cash).
Deductible amount can be upto Rs. 25,000 (maximum limit is Rs. 5,000 for preventive health check-up). In case of senior citizens (60 years), additional deduction of Rs. 25,000 is available but only in case of mediclaim insurance premium and not available for CGHS or preventive health check-up.
Any payment made on account of medical expenditure in respect of a super senior citizen (80 years or more), if no payment has been made to keep in force an insurance on the health of such person, as does not exceed in the aggregate Rs. 50,000 shall be allowed as deduction under section 80D.
Maintenance including medical treatment of a dependent who is a person with disability [Sec. 80DD]
This deduction is for resident individual and resident HUF for –
a. Expenditure on medical treatment (including nursing), training and rehabilitation of a disabled dependent relative or/ and
b. Amount paid under any scheme framed by the LIC or other insurer, etc.
Amount of deduction is Rs. 75,000 and Rs. 1,25,000 for severe disability (if disability is 80% or more than 80%). This amount is fixed irrespective of actual expenditure.
Dependent includes spouse, children, parents, brothers and sisters of the individual. In case of HUF dependent refers to any member of HUF.
Medical treatment [Sec. 80DDB]
This deduction is available to a resident individual and resident HUF for medical treatment of notified diseases.
Amount of deduction is Rs. 40,000 or amount paid, whichever is less. For senior citizens (60 years or more), amount of deduction is Rs. 1,00,000 or amount paid, whichever is less.
From the aforesaid amount of deduction, amount received from an insurer or amount reimbursed by the employer shall be deducted and the balance shall be allowed as deduction.
Expenditure should be incurred for medical treatment of the assessee himself or dependent spouse, children, parents, brothers and sisters of the individual assessee. In case of HUF dependent refers to any dependent member of HUF.
Donations to certain funds, charitable institutions, etc. [Sec. 80G]
This deduction is available to all the taxpayers. Donations are divided into two categories. On some donations, deduction is available on the amount donated but, on some donations, there is a limit on which benefit of deduction is available. In this second category of donations, if the assessee has donated the amount more than the limit, then on the excess amount donated, benefit of deduction is not available. Table 1 given below contains donations on which there is no limit. Total amount donated, here, is eligible for the benefit of deduction. Excess amount (i.e., the amount donated which exceeds the limit) is not eligible for the benefit of deduction under section 80G.
On the following donations, no maximum limit is applicable. Taxpayer can donate the amount without any limit:
| Donee | Deduction (in %age) |
| 100% | |
| Prime Minister’s National Relief Fund | 100% |
| National Children’s Fund | 100% |
| Prime Minister’s Armenia Earthquake Relief Fund | 100% |
| National Foundation for Communal Harmony | 100% |
| An approved university/ educational institution | 100% |
| Any fund set up by the Government of Gujarat for providing relief to victims of earthquake in Gujarat | 100% |
| Zila Saksharta Samiti | 100% |
| National Blood Transfusion Council (NBTC) and State Council for Blood Transfusion | 100% |
| Fund set up by a State Government for the medical relief to the poor | 100% |
| Central Welfare Fund of the Army and Air Force and the Indian Naval Benevolent Fund | 100% |
| Andhra Pradesh Chief Minister’s Cyclone Relief Fund | 100% |
| National Illness Assistance Fund | 100% |
| Chief Minster’s Relief Fund or Lieutenant Governor’s Relief Fund | 100% |
| National Sports Fund or National Cultural Fund or Fund for Technology Development and Application | 100% |
| National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities | 100% |
| Swachh Bharat Kosh, National Fund for Control of Drug Abuse | 100% |
| Clean Ganga Fund (amount donated by residents only) | 100% |
| Prime Minister’s Drought Relief Fund | 50% |
| Jawaharlal Nehru Memorial Fund | 50% |
| Indira Gandhi Memorial Trust | 50% |
| Rajiv Gandhi Foundation | 50% |
On the following donations, there is a restriction on the amount which is eligible for deduction under this section:
| Government or any approved local authority, institution or association to be utilised for the purpose of promoting family planning | 100% |
| Government or any local authority to be utilised for any charitable purpose other than the purpose of promoting family planning | 50% |
| Any other approved fund* or any institution which satisfies the conditions mentioned in section 80G(5) | 50% |
| Any authority constituted in India by (or under) any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose planning, development or improvement of cities, towns and villages, or for both | 50% |
| Any corporation for promoting interest of minority community | 50% |
| Any notified temple, mosque, gurudwara, church or other place (for renovation or repair) | 50% |
Maximum amount:
The maximum amount for all the deductions given in Table 2 above must not exceed 10% of the adjusted gross total income i.e., where the aggregate of sums mentioned in the above table exceeds 10% of the adjusted gross total income, then the amount in excess of 10% of the adjusted gross total income will be ignored while computing the aggregate of the sums in respect of which deduction is to be allowed.
Adjusted gross total income:
The following shall be deducted from gross total income to find out adjusted gross total income:
a. Amount deductible under sections 80C to 80U (except section 80G);
b. Such incomes on which income-tax is not payable;
c. Long-term capital gains;
d. Short-term capital gain which is taxable under section 111A @ 15%; and
e. Incomes referred to in section 115A, 115AB, 115AC or 115AD.
Mode of payment:
1. Donation can be given in cash or by cheque or draft. Donation in kind is not included.
2. It is to be noted that no deduction shall be allowed under section 80G in respect of donation in cash of an amount exceeding Rs. 2,000.
Royalty income of authors [Sec. 80QQB]
1. This section is applicable if the following conditions are satisfied:
a. The taxpayer is a resident individual (may be an Indian citizen or foreign citizen).
b. He is an author or joint author.
c. The book authored by him is work of literary, artistic or scientific nature.
However, the “books” shall not include brouchers, commentaries, diaries, guides, journals, magazines, newspapers, pamphlets, text-books for schools, tracts and other publications of similar nature, by whatever name called.
d. The gross total income of the taxpayer includes the following:
i. Royalty or copyright fees (payable in lump sum or otherwise) in respect of aforesaid book; and
ii. Lump sum consideration for transfer (or grant) of any interest in the copyright of the book.
2. Amount of deduction:
If the aforesaid conditions are satisfied, then the amount of deduction is
– a. Rs. 3,00,000; or
b. Income from royalty as stated above, whichever is lower.
3. Note:
Where the income by way of royalty (or the copyright fee) is not a lump sum consideration (in lieu of all rights of the assessee in the book) so much of the income (before allowing expenses attributable to such income) as is in excess of 15% of the value of such books sold during the previous year, shall be ignored.
Note: The summary of Income Tax Notes Part - 07 SET OFF AND CARRY FORWARD OF LOSSES summarise from the content of Book of School of Open Learning. © School of Open Learning.
