Set off and carry forward of losses is an important concept under the Income Tax Act. It helps taxpayers reduce tax burden by adjusting losses against income. The rules of set off and carry forward are mostly similar in both Old and New Tax Regimes, but some restrictions exist in the New Regime, especially relating to house property losses and deductions.
SET OFF AND CARRY FORWARD OF LOSSES UNDER OLD REGIME
Set off of loss means adjusting losses of one source of income against income from another source or head of income in the same assessment year. The Income Tax Act allows set off to ensure fair taxation and avoid taxing gross income without considering losses.
Types of Set Off under Old Regime:
1. Intra Head Set Off
Intra head set off means adjustment of loss from one source against income from another source under the same head of income.
For example, loss from one house property can be set off against income from another house property. Business loss from one business can be set off against profit from another business.
However, some restrictions apply. Speculation loss can be set off only against speculation profit. Loss from owning and maintaining race horses can be set off only against income from the same source.
2. Inter Head Set Off
Inter head set off means adjusting loss from one head of income against income from another head of income.
Under the Old Regime, the following rules apply
- Loss from house property can be set off against any other head of income such as salary or business income, subject to a maximum limit of Rs 2,00,000 per year
- Business loss cannot be set off against salary income
- Capital loss cannot be set off against income other than capital gains
- Speculation loss cannot be set off against non speculation income
Inter head set off is one of the major tax planning benefits under the Old Regime.
Set Off of Loss under Different Heads
- House Property Loss
Loss from house property can arise mainly due to interest on housing loan. Under Old Regime, such loss can be set off against salary or any other income up to Rs 2,00,000 in the same year. Remaining loss can be carried forward.
- Business and Profession Loss
Business loss other than speculation loss can be set off against any income except salary. If not fully adjusted, it can be carried forward.
- Capital Loss
Short term capital loss can be set off against both short term and long term capital gains. Long term capital loss can be set off only against long term capital gains. Capital losses cannot be adjusted against other heads.
- Speculation Loss
Speculation loss can be set off only against speculation profit and not against normal business income.
- Loss from Other Sources
Loss from other sources can be set off against income from other sources or any other head except salary. Loss from race horses has special restrictions.
Carry Forward of Losses under Old Regime
If loss cannot be fully adjusted in the same year, it can be carried forward to future years, provided the return is filed on time.
- Carry Forward Period
House property loss can be carried forward for 8 years
Business loss can be carried forward for 8 years
Speculation loss can be carried forward for 4 years
Short term and long term capital loss can be carried forward for 8 years
Loss from race horses can be carried forward for 4 years
- Conditions for Carry Forward
Return of income must be filed before due date
Loss must be computed under the Act
Loss can be carried forward only by the same assessee
- Importance of Old Regime for Loss Adjustment
The Old Regime provides greater flexibility in adjusting losses, especially house property loss. Taxpayers with home loans, business losses, or capital losses generally benefit more under this regime.
SET OFF AND CARRY FORWARD OF LOSSES UNDER NEW REGIME
The New Tax Regime introduced under Section 115BAC aims to simplify taxation by offering lower tax rates but restricts many exemptions and deductions. Set off and carry forward rules are also more restrictive, especially for house property losses.
Set Off of Loss under New Regime
- Intra Head Set Off
Intra head set off is allowed under the New Regime similar to the Old Regime. Loss from one source can be adjusted against income from another source under the same head, subject to specific restrictions.
For example, loss from one business can be set off against profit from another business. Capital losses can be set off only against capital gains.
- Inter Head Set Off
Inter head set off is restricted under the New Regime.
The most important restriction is
Loss from house property cannot be set off against any other head of income such as salary or business income.
This is a major difference between the two regimes.
- House Property Loss under New Regime
Under the New Regime, loss from house property cannot be adjusted against any other income. Even the Rs 2,00,000 benefit available in Old Regime is not allowed.
Only adjustment allowed is
Income from one house property can be set off against loss from another house property.
If loss still remains, it cannot be carried forward.
This rule discourages tax planning through home loan interest deductions.
- Business and Profession Loss under New Regime
Business loss can be set off against income from business or profession only. It cannot be set off against salary income.
Carry forward of business loss is allowed if it is not related to deductions not permitted under the New Regime.
Loss related to disallowed deductions such as depreciation under additional depreciation provisions cannot be carried forward.
- Capital Loss under New Regime
Capital loss treatment remains the same as Old Regime.
Short term capital loss can be set off against short term and long term capital gains.
Long term capital loss can be set off only against long term capital gains.
Carry forward for 8 years is allowed provided return is filed on time.
- Speculation Loss
Speculation loss rules remain unchanged. It can be set off only against speculation profit and carried forward for 4 years.
- Loss from Other Sources
Loss from other sources can be set off against income from other sources only. Loss from race horses continues to have separate treatment.
Carry Forward of Losses under New Regime
- Allowed Carry Forward
Business loss not linked to disallowed deductions
Capital losses
Speculation losses
Loss from other sources
- Not Allowed Carry Forward
House property loss
Loss related to deductions not permitted under Section 115BAC
Comparison Summary between Old Vs New Regime of Set-off and Carry Forward of Losses
| Particulars | Old Tax Regime | New Tax Regime |
|---|---|---|
| Intra head set off | Allowed under same head of income | Allowed under same head of income |
| Inter head set off | Allowed with certain restrictions | Highly restricted |
| House property loss set off | Allowed against other income up to Rs 2,00,000 | Not allowed against other income |
| Carry forward of house property loss | Allowed for 8 assessment years | Not allowed |
| Business Loss Set off | Allowed against any income except salary | Allowed only against business income |
| Carry forward of Business Loss | Allowed for 8 assessment years | Allowed subject to conditions |
| Speculation Loss Set off | Allowed only against speculation income | Same as Old Regime |
| Carry forward of Speculation Loss | Allowed for 4 assessment years | Allowed for 4 assessment years |
| Short term Capital loss set off | Allowed against STCG and LTCG | Same as Old Regime |
| Long term Capital loss set off | Allowed only against LTCG | Same as Old Regime |
| Carry forward of Capital Loss | Allowed for 8 assessment years | Allowed for 8 assessment years |
| Loss from other sources set off | Allowed except against salary | Same as Old Regime |
| Loss from Race horses | Special restriction applies | Same as Old Regime |
| Condition of filing return | Return must be filed within due date | Return must be filed within due date |
| Overall flexibility | More flexible and beneficial | More restrictive and simplified |
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