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Rules for taxpayers to set off losses while filing tax returns
November, 29th 2021

Neha Malhotra, director, Nangia Andersen LLP, said two mechanisms of intra-head and inter-head adjustments are allowed. “Taxpayers are allowed to adjust loss from a source under a particular head of income against income from another source under the same head of income, called intra-head adjustment. For instance, business income and loss from two business undertakings, respectively. After making intra-head adjustments, taxpayers can also adjust loss under one head of income against income under another head of income. For example, loss from business can be set-off against short-term capital gains. This is known as inter-head adjustment," said Malhotra.


Capital losses: Losses from a capital asset can only be set off against capital gains. “Loss under head ‘capital gains’ cannot be set off against income under other heads of income," said Malhotra. Rules vary depending on whether the losses are short-term or long-term. Long-term capital losses can only be set off against long-term gains, whereas short-term capital losses can be set off against long-term or short-term capital gain both.

However, capital gains, both long-term and short-term, can be used to set off losses.

Business and house property loss: Adjustment of loss from business depends on whether the business is speculative or non-speculative. “Loss from speculative business cannot be set off against any income other than income from speculative business. However, non-speculative business loss can be set off against income from speculative business," said Malhotra.

Loss from lotteries, crossword puzzles, race including horse race, card game and any other game of any sort or from gambling or betting of any form or nature cannot be set off or carried forward. However, loss from the business of owning and maintaining race horses can be set off against income from the business of owning and maintaining race horses. Setting-off rules from loss from a house property are relatively generous. It can be set off against any other head of income, but only to the extent of ₹2 lakh in a particular assessment year. If loss is not completely set off, it can be carried forward to the next year but in such case, it can only be set off against income from a house property.

“Further, loss from a house property can also be carried forward to the following eight assessment years even if the return of income/loss of the year in which loss is incurred is not furnished on or before the due date of furnishing the return, as prescribed under section 139(1)," said Malhotra.

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