Skip to main content

How to Adjust losses in the Income tax return?

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

 

Popular posts from this blog

Mutual Fund Exit Load Changes

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Mutual Fund Exit Load Changes AMCs don't communicate about any change in exit load directly with investors, but do update on their website   The exit load applicable to your investments is the load which existed at the time when you invested in the particular fund. Any subsequent changes in the exit load will not be applicable to your investments.   However, Asset Management Companies ( AMCs ) periodically publish addendums in the newspapers, which state any change in exit loads of specific schemes managed by them. Such changes are also posted on their websites. However, a direct communication to an investor is not made, considering the costs involved in doing so. In their own interests, investors should not only track the performance of the funds they i...

Atal Pension Yojana contribution Tax Benefit for spouse

Contributions to Atal Pension Yojana (APY) are eligible for the same tax benefits as the NPS. This means that the contributions can be claimed under Section 80CCD (1B). The current limit for Section 80CCD (1B) is   Rs   50,000, over and above the   Rs   1.5 lakh limit under Section 80C. Section 80 CCD (1) is a different one, meant to cover employers' contribution towards NPS . You cannot get tax benefit by investing in the name of your spouse under Section 80 CCD . ------------------------------ ----------------- Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds Top 10 Tax Saver Mutual Funds to invest in India for 2016 Best 10 ELSS Mutual Funds in India for 2016 1. BNP Paribas Long Term Equity Fund 2. Axis Tax Saver Fund 3. Religare Tax Plan 4. DSP BlackRock Tax Saver Fund 5. Franklin India TaxShield 6. ICICI Prudential Long Term Equity Fund 7. IDFC Tax Advantage (ELSS) Fund 8. Birla Sun Life Tax Relief 96 9. ...

Birla Sun Life Mutual Fund Launches Birla Sun Life NIFTY ETF

Birla Sun Life has launched a new fund namely, Birla Sun Life Nifty ETF, an open ended exchange traded fund. The new fund will be open for subscription from 4th July to 18th July 2011, at an offer price of Rs 10 per unit. The investment objective of the scheme is to generate returns that closely correspond to the total returns of securities as represented by S&P CNX Nifty, subject to tracking errors. No exit load will be charged under the scheme. The performance of the scheme will be benchmarked against S&P CNX Nifty and will be managed by Satyabrata Mohanty.   -----------------------------------------------------------------   Also, know how to buy mutual funds online:   1) DSP BlackRock Mutual Funds: http://prajnacapital.blogspot.com/2011/05/buying-dsp-blackrock-mutual-funds.html   2) Reliance Mutual Funds: http://prajnacapital.blogspot.com/2011/06/buying-reliance-mutual-funds-online.html   3) Birla Sunlife Mutual Funds: http://prajnacapital.blogspot.com/2011/...

Mutual Fund Reivew: Birla Sun Life Asset Allocation Conservative

Birla Sun Life Asset Allocation Conservative has numbers on its side to prove its credibility… Don't be surprised to find this Fund of Funds ( FoF ) in our recommendations. It has earned its place. And despite the difference in the structure of the product, there is no arguing with the numbers.   Of the total 6 years of its existence, the fund has been among the top 10 funds in its category in four of them. Last year it put up an average show and the only year it underperformed its peers was in 2008.   One aspect to look at when investing in an FoF is the expense ratio. The expense ratio of an FoF is capped at a lower limit of 0.75 per cent (2.50% for an actively managed fund). However, the FoF not only has its own expense (though lower) but even the expense ratio of the fund it is investing into. Fortunately, the fund manager takes that into account. "Expense is one of the important criteria used for fund selection and is the main reason for our investment in BSL Ind...

Short-Term Investment Options in Mutual Funds

Mutual funds offer liquid funds and ultra short term funds in the debt category, which are suitable for short investment periods. Ultra short-term funds were earlier known as liquid plus funds. Liquid funds invest in money market instruments with a maturity of 91 days or less. However, there are no such restrictions for ultra short-term funds. Who should invest in these? These are open-ended schemes. Investors with a short investment horizon or with surplus cash and low risk appetite should look at these. These could include corporate as well as retail investors. Those interested in staying invested for less than 15 days can opt for liquid funds. Retail investors who want to remain invested for two-four months, can look at ultra short-term funds. The short duration for both liquid and ultra short-term funds shields them from any interest rate volatility.   What kind of returns do they offer? In terms of an investment period less than 15 days, these funds are comparable to a ba...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now