Income-tax laws provide taxpayers an option to set off losses other than those under the head ‘capital gains’, incurred in one source against income earned from another source under the same head.
Further, they provide an opportunity to set off the unadjusted losses under a head during the present year against other heads of income, subject to certain conditions.
It’s here that the provision relating to carry forward of leftover losses to future years for further setoff within the respective heads of income comes into the picture.
To avail the benefit of carry forward of losses incurred during the previous year, it is crucial to file your income-tax returns by the due date.
Conversely, an exception to this onus is that losses from house property and unabsorbed depreciation can be carried forward to future years even if the returns are not filed within the due date. Further, late filing of income-tax returns in one particular year should not have any impact on the carry forward of losses relating to earlier years in which the returns were duly filed.
Let us take a tour of the riders on hand specific to each head of income.
Salary: This is the sole safe head under which no losses can be suffered and, hence, the question of carry forward does not arise.
House property: Losses remained unabsorbed even after setoff against any other head of income are allowed to be carried forward to subsequent eight years, which can be utilised to setoff only against any income generated from the house property in the next eight years. Further, there is no need to comply with the pre-requisite of filing returns in time to avail the benefit of carry forward of house property losses.
Business/profession: Non-speculative business losses are allowed to be carried forward for subsequent eight years to set off against any business income. Unadjusted losses incurred in speculative business can be carried forward to next four years and are available for setoff against only speculative business profits. Unabsorbed depreciation can be utilised to set off against all other incomes except against salary income in subsequent years without any time limit.
There is a requirement to file the returns on or before due date to carry forward losses from business except for unabsorbed depreciation. Further, losses from specified businesses, such as setting up and operating warehousing facility for storage of agricultural produce, developing and building housing projects, etc., can be carried forward to future years without any limit and set off against any specified business.
Capital gains: Short- and long-term capital gains/losses are classified on the basis of period of holding of the concerned capital asset and the losses incurred under this head cannot be utilised to set off against any other head of income and restricted to the respective capital gains. Both the short- and long-term capital losses, which are unabsorbed during the current year, can be carried forward to succeeding eight years.
However, while the short-term capital losses can be set off against both short-term and long-term capital gains, the long-term capital loss can be set off only against long-term capital gains. Filing return within the due date is a mandatory condition to comply with.
Other sources: Losses incurred and unadjusted from owning and maintaining race horses during the previous year can be carried forward and set off in the following four years, only against any income derived from owning and maintaining race horses. The requisition of filing of return within due date shall also be adhered to utilise the carry-forward option. No losses other than from the activity of owning and maintaining race horses can be carried forward under this head.
The writer is partner, Deloitte Haskins & Sells LLP. With inputs from Sistla Venkateswarlu, director and Shahansha D, deputy manager, Deloitte Haskins & Sells LLP