Skip to main content

The I-T Act - Lower liability with losses with adjustment of capital loss

The I-T Act allows taxpayers to adjust capital lost with any income or gains made in another year

One very important aspect of filing returns is the adjustment of losses. The Income Tax (I-T) Act allows taxpayers, under certain conditions, to set-off loss against income or gains, reducing the net tax liability. If such loss is not fully set-off in one year, it can be carried forward. It is necessary for every taxpayer to understand and take advantage of this facility.

INTER-SOURCE ADJUSTMENT

You can earn income from salary, house property, business or profession, capital gains and residuary income from other sources. There cannot be a loss from salary and income from other sources. But, you could suffer losses under other heads of income.

Loss under one head has to be adjusted against any gain under the same head. This is known as Inter-Source Adjustment. Say, you have two businesses, one is making a loss and the other is profit-making. Then, the loss from the first one can be set-off against profit from the second one. Similarly, if you have two house properties, one self occupied and the other on rent. Loss from the first property can be adjusted against the income from the second property.

INTER-HEAD ADJUSTMENT

If there is some loss leftover, even after setting it off as above. This can then be adjusted against income from other heads. This is called Inter-Head Adjustment. For instance, if you have a single self-occupied house property bought on mortgage, it will show loss. Reason: 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. Such a loss may be adjusted with salary or business income, if any.

There are two exceptions to this rule. One, losses under capital gains cannot be set-off with income from any other head. Two, loss from business cannot be setoff against salary income.

CARRY FORWARD THE LOSS

Any loss that cannot be set-off against the same or other heads because of inadequacy of income may be carried forward to the subsequent year. Such a carry-forward exercise can be done for eight years. After eight years, if the loss has still not been adjusted fully, it has to be written off.

Importantly, for carry-forward losses, only Inter Source Adjustment is available in the subsequent years and not InterHead. (See Table)

CAPITAL GAINS

Losses under capital gains have a boundary. This means, these have to be adjusted against other capital gain only and not against other incomes. Long-term capital loss (LTCL) can be adjusted only with longterm capital gains (LTCG), not short-term one. But, short-term capital loss (STCL)can be set-off either with long- or shortterm capital gain (STCG).

If the income from some source is exempted from tax, loss from such a source cannot be set-off. Any long-term loss on sale of shares or equity funds cannot be set-off at all, as the long-term gain from the sale of these instruments is exempted. Example: LTCL (shares) `20,000 LTCG (equity funds) `60,000 STCL (shares) `40,000 LTCL (debt funds) `25,000 STCG (shares) `50,000 LTCG (gold) `15,000 The LTCL from shares ( `20,000) cannot be set-off, since the LTCG from it ( `15,000) is exempted. LTCL from nonequity funds ( `25,000) can be adjusted only with LTCG from gold ( `15,000). Therefore, only `15,000 can be adjusted, the balance `10,000 cannot be. Lastly, the STCL from shares ( `40,000) can be setoff against the STCG from it ( `50,000) and only the balance `10,000 would be taxed.

For being eligible to carry forward and set-off any loss against profits, it is important to file tax returns. If the loss return is filed after the due date, the I-T department may condone the delay only if it is satisfied with the reason behind you not being able to filing the returns on time .

The writer is Director, Wonderland Consultants

TAXATION

Loss carried forward                                                           Adjust Against

House Property Loss                                                           House property income

Business Loss                                                                      Business gain

Capital Loss

a) Short-term                                                                       Capital gains

b) Long-term                                                                       Only long-term capital gains

*Losses can be carried forward for the next 8 yrs

Popular posts from this blog

Mutual Fund Review: Religare Tax Plan

Tax Plan is one of the better performing schemes from Religare Asset Management. Existing investors can redeem their investment after three years. But given the scheme's performance, they can continue to stay invested   Given the mandated lock-in period of three years, tax saving schemes give the fund manager the leeway to invest in ideas that may take time to nurture. Religare Tax Plan's investment ideas revolve around 'High Growth', which the fund manager has aimed to achieve by digging out promising stories/businesses in the mid-cap segment. Within the space, consumer staples has been the centre of attention for the last couple of years and can be seen as one of the key reasons for the scheme's outperformance as compared to the broader market. It has, however, tweaked its focus and reduced exposure in midcaps as they were commanding a high premium. The strategy seems to have worked as it returned a 22% gain last year. Religare Tax Plan has outperformed BSE 100...

ICICI Prudential Balanced Fund

 ICICI Prudential Balanced Fund scheme seeks to generate long-term capital appreciation and current income by investing in a portfolio that is investing in equities and related securities as well as fixed income and money market securities. The approximate allocation to equity would be in the range of 60-80 per cent with a minimum of 51 per cent, and the approximate debt allocation is 40-49 per cent, with a minimum of 20 per cent. An impressive show in the last couple of years has propelled this fund from a three-star to a four-star rating. The fund has traditionally featured a high equity allocation, hovering at well over 70 per cent, which is higher than the allocations of the peers. But in the last one year, the allocation has been moderated from 78-79 per cent levels to 66-67 per cent of the portfolio. ICICI Prudential Balanced Fund appears to practise some degree of tactical allocation based on market valuations. Within equities, well over two-thirds of the allocation is parked i...

Good time to invest in Infrastructure Funds

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   Good time to invest in infrastructure The Sensex has gained almost 10 per cent from May 15 till date, while the CNX Infrastructure Index has gained almost 17 per cent in the period. The price to earnings ( P/ E) ratio of the BSE Sensex is 18.96; for the CNX Infrastructure Index, it is 24.57. The estimated P/ E for next year is 14.04 for the Sensex. Of the 24 companies that make up the CNX Infrastructure Index, six have a P/ E higher than 20. Does this mean infrastructure is fairly valued? Or, has it run up quite a bit? According to experts, barring stray companies, the infra sector is fairly valued and it is a good time to invest. Even if some companies are facing debt restructuring problems, once interest rates come down and regulatory norms become flexible, they will start giving good re...

TDS Rate and Personal Account Number(PAN)

    The TDS rate doubles to 20% from 10% if you fail to mention your Personal Account Number   IF you run a glance through your pay slip, you will come across something called TDS, which is tax deduction at source. In most cases, the employer deducts this amount at the time of payment of salary itself and pays the total tax amount to the government on behalf of all the employees. If you are a self- employed or practicing professional s, you have to pay this amount yourself.    Tax deducted at source is one of the modes of income tax collection by the government. Under the income-tax laws, income tax at specified rates is required to be deducted while making certain payments.    The rate of deduction of tax at source on interest and rent payment is 10%. For salary payments, the employers deduct income tax at source on a monthly basis after computing income tax liability on estimated annual taxable income of the employee. Tax benefits on housing loan, investments, etc are consid...

Tax Planning: Income tax and Section 80C

In order to encourage savings, the government gives tax breaks on certain financial products under Section 80C of the Income Tax Act. Investments made under such schemes are referred to as 80C investments. Under this section, you can invest a maximum of Rs l lakh and if you are in the highest tax bracket of 30%, you save a tax of Rs 30,000. The various investment options under this section include:   Provident Fund (PF) & Voluntary Provident Fund (VPF) Provident Fund is deducted directly from your salary by your employer. The deducted amount goes into a retirement account along with your employer's contribution. While employer's contribution is exempt from tax, your contribution (i.e., employee's contribution) is counted towards section 80C investments. You can also contribute additional amount through voluntary contributions (VPF). The current rate of interest is 8.5% per annum and interest earned is tax-free. Public Provident Fund (PPF) An account can be opened wi...
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