As per Income Tax Act any income that you earn, is classified under five different heads, namely:
- Salary
- Income from house property
- Profit from business or profession
- Capital Gains
- Income from other sources
It can, however, happen that you make a loss instead of any gains under a particular head of income. Subject to certain conditions, you are permitted to reduce your overall tax liability by adjusting such losses in any financial year — called Set Off of Losses — against different incomes during the said financial year.
There can be two types of set-off of losses and the important provisions in this regard under the Income Tax Act are discussed below.
Intra-head or inter-source adjustments
The process of adjusting a loss against an income from different sources under the same head of income is called intra-head or inter-source adjustment. For example, adjusting loss on sale of a share held for less than a year against gains in another share also held for less than a year.
Key restrictions on intra-head set-off of losses are:
- Long-term capital loss has to be set-off only against long-term capital gains. However, you can adjust any short-term capital loss against long-term or short-term capital gains.
- You are not allowed to set-off any losses against the amounts that you win from lottery, horse racing, crossword puzzles, gambling, betting or any other game.
- Loss from speculative business has to be set-off against gains from speculative business only. Though, loss from non-speculative business can be adjusted against income from speculative business.
Inter-head adjustments
It may so happen that you still end-up with a loss under a particular head of income even after intra-head adjustments. This loss can be set-off against income under a different head. For example, you can adjust loss under the head house property against your salary and reduce your taxable income.
Key restrictions on inter-head set-off of losses are:
- You have to first make intra-head adjustment, before you can do inter-head adjustment
- Loss under the head Capital Gains cannot be set-off against any other head of income
- Loss under the head Business or Profession cannot be set-off against Salary income
- Loss from speculative business cannot be adjusted against any other income
Important: If there is no tax applicable on a particular source of income, then any loss from such a source cannot be set off against any other taxable income. As such, if you make a loss on sale of shares held for more than a year, you cannot set it off against any other income (since long term capital gains on shares is tax free).
What if, even after both intra and inter-head adjustments, you have a loss. The beauty of Income Tax Act is that it allows you to carry forward such unadjusted losses to subsequent financial years and adjust them against incomes in that year.
However, keep in mind that
(a) there is a limit to the number of years you can carry forward your losses and
(b) the provisions for set-off of losses in the future years may, in some cases, differ from the aforesaid rules for set-off in the same financial year.
- Salary
- Income from house property
- Profit from business or profession
- Capital Gains
- Income from other sources
It can, however, happen that you make a loss instead of any gains under a particular head of income. Subject to certain conditions, you are permitted to reduce your overall tax liability by adjusting such losses in any financial year — called Set Off of Losses — against different incomes during the said financial year.
There can be two types of set-off of losses and the important provisions in this regard under the Income Tax Act are discussed below.
Intra-head or inter-source adjustments
The process of adjusting a loss against an income from different sources under the same head of income is called intra-head or inter-source adjustment. For example, adjusting loss on sale of a share held for less than a year against gains in another share also held for less than a year.
Key restrictions on intra-head set-off of losses are:
- Long-term capital loss has to be set-off only against long-term capital gains. However, you can adjust any short-term capital loss against long-term or short-term capital gains.
- You are not allowed to set-off any losses against the amounts that you win from lottery, horse racing, crossword puzzles, gambling, betting or any other game.
- Loss from speculative business has to be set-off against gains from speculative business only. Though, loss from non-speculative business can be adjusted against income from speculative business.
Inter-head adjustments
It may so happen that you still end-up with a loss under a particular head of income even after intra-head adjustments. This loss can be set-off against income under a different head. For example, you can adjust loss under the head house property against your salary and reduce your taxable income.
Key restrictions on inter-head set-off of losses are:
- You have to first make intra-head adjustment, before you can do inter-head adjustment
- Loss under the head Capital Gains cannot be set-off against any other head of income
- Loss under the head Business or Profession cannot be set-off against Salary income
- Loss from speculative business cannot be adjusted against any other income
Important: If there is no tax applicable on a particular source of income, then any loss from such a source cannot be set off against any other taxable income. As such, if you make a loss on sale of shares held for more than a year, you cannot set it off against any other income (since long term capital gains on shares is tax free).
What if, even after both intra and inter-head adjustments, you have a loss. The beauty of Income Tax Act is that it allows you to carry forward such unadjusted losses to subsequent financial years and adjust them against incomes in that year.
However, keep in mind that
(a) there is a limit to the number of years you can carry forward your losses and
(b) the provisions for set-off of losses in the future years may, in some cases, differ from the aforesaid rules for set-off in the same financial year.
