One very important aspect of the return filing process is the adjustment of losses.
The Income-Tax Act allows taxpayer under certain conditions to set-off loss against income, thereby reducing the net tax liability. If such loss cannot be fully set off, the remaining balance can even be carried forward for set-off in future years. It is necessary to properly understand and take advantage of facilities in this regard, to optimise the tax return and ensure minimum tax payment.Inter-source adjustment
There are five heads of income under which any taxpayer can earn income — salary, house property, income from business or profession, capital gains and the residuary income from other sources.
Now, by definition, there cannot be a loss from salary and income from other sources. However, a person could suffer losses from other heads of income.
The first and foremost rule is that loss under one head of income has to be first adjusted against any income from the same head. This is known as inter-source adjustment.
For example, say someone who has two different businesses — one that is loss-making and the other profit-making — then the loss from the first one can be set-off against the profit from the second one. Or say if you have two properties, one for self-occupation and the other one given out on rent, then the loss from the first property (on account of the mortgage interest) can be set off against the rental income from the second property.
The only exception in this regard is to do with long-term capital gains, which we shall examine later on in the article.
Inter-head adjustment Now say after setting off the loss as above, there still remains some balance. This balance loss can then be set-off against income from other heads. This is known as inter-head adjustment.
For example, a taxpayer who has a single self-occupied house property bought on mortgage will necessarily show a loss. This is because the annual value of a single self-occupied property is taken to be nil and the adjustment of any interest will result in a negative value. Now, such a loss may be adjusted against salary income or say income from business, if any. There are two exceptions to the rule of inter-head adjustment:
Losses under capital gains cannot be set-off against income from any other head
Loss from business or profession cannot be set-off against salary income
Carry forward of losses
And last but not the least, any loss that cannot be set-off either against the same head or under other heads because of inadequacy of income, may be carried forward to be set-off against income of the subsequent year. Such a carry forward exercise may be done for 8 years.
After 8 years, if the loss hasn't yet been fully set-off, it has to be written-off and cannot be used for tax saving. The important point to note is that for carry-forward losses, only inter-source adjustment is available in the subsequent years and not the inter-head one. able
Adjustment of loss under capital gains head
The first and foremost point to note about losses under the head capital gains is that they have a boundary i.e. they have to be adjusted against other capital gain income only and other incomes are not available for the setting off. In other words, the inter-head adjustment referred to earlier is not available in the case of capital losses.
The second condition in this regard is that long-term capital loss can only be adjusted against long-term capital gain. However, short-term capital loss can be set-off against any taxable long-term capital gain or short-term capital gain.
Lastly, if the income from a particular source is exempted from tax, loss from such a source cannot be set-off. This means any long-term loss on sale of shares or equity oriented mutual funds cannot be set-off at all as long-term gain from the sale of these instruments is exempted. In other words, loss of profits must be a loss of taxable profits.
Let's understand this with an example
Now, LTCL from shares cannot be set-off since the LTCG from this source (in this case Rs 60,000) is exempted. The LTCL from non-equity MFs of Rs 25,000 can only be adjusted against the LTCG from sale of gold. Therefore, only Rs 15,000 can be adjusted and the balance Rs 10,000 will be non-adjustable. Lastly, the Rs 40,000 STCL from sale of shares can be adjusted against the Rs 50,000 STCG and only the balance Rs 10,000 STCG would be taxable.
Lastly, note that for being eligible to carry forward and set-off any loss, it is important to file the tax return by the specified due date. If the loss return is submitted after the due date, the board may condone the delay only if it is satisfied that it was due to genuine hardship on the part of the taxpayer
