TAX TALK
Set off your losses to keep tax liability to the minimum
VINEETAGARWAL
Posted: Friday, Oct 19, 2012 at 0315 hrs IST
: The total income of a taxpayer is computed by totaling the income from all sources. The Income-Tax Act, 1961 recognises that people can incur financial losses from one source and have income from another and it will be wrong to penalise the person only on the income. Hence, the IT Act has allowed for setting off such losses against other incomes and, thereby, reducing the tax outflow of a person.
Stepwise procedure followed under IT Act
Step 1: Adjusting the losses with income under the same head of income;
Step 2: If such adjustment is not possible, then adjusting with other heads of income in the same year;
Step 3: If even this adjustment is not possible, carry forwarding the losses and adjusting it in subsequent years.
A practical example could be loss under the head, house property. As a first step, the same can be adjusted if the individual has positive income from another house property. If the same is not there, the individual can set off the house property loss from income under other heads in the same financial year. Even then, if the loss cannot be set off, it can be carried forward and set off from the house property income earned in the subsequent years.
It’s important to know that there are some restrictions in the IT Act and not all losses can be set off/carried forward. For example, business loss cannot be set off against salary income; likewise, loss from speculation business, capital loss, and some specified losses cannot be set off from other heads of income.
The following losses can be carried forward and set off in the subsequent years:
Loss from house property can be carried forward for eight years and adjusted with income from the house property. Loss from business or profession can be carried forward for eight years and adjusted with income from business or profession for eight years. Loss from capital gains can be carried forward for eight years and adjusted with income from capital gains.
Long-term capital loss can be set off against long-term capital gains only, whereas short-term capital loss can be set off against short-term capital gains or long-term capital gains. Loss from income from other sources arising on account of owning and maintaining race horses can be carried forward for four years only.
The tax returns should be filed within the due date to carry forward the losses, subject to certain exceptions. It should also be ensured that details regarding losses are properly mentioned while preparing the tax returns.
The author is a director in KPMG. The views expressed are personal
http://www.financialexpress.com/news/set-off-your-losses-to-keep-tax-liability-to-the-minimum/1018783/0
Stepwise procedure followed under IT Act
Step 1: Adjusting the losses with income under the same head of income;
Step 2: If such adjustment is not possible, then adjusting with other heads of income in the same year;
Step 3: If even this adjustment is not possible, carry forwarding the losses and adjusting it in subsequent years.
A practical example could be loss under the head, house property. As a first step, the same can be adjusted if the individual has positive income from another house property. If the same is not there, the individual can set off the house property loss from income under other heads in the same financial year. Even then, if the loss cannot be set off, it can be carried forward and set off from the house property income earned in the subsequent years.
It’s important to know that there are some restrictions in the IT Act and not all losses can be set off/carried forward. For example, business loss cannot be set off against salary income; likewise, loss from speculation business, capital loss, and some specified losses cannot be set off from other heads of income.
The following losses can be carried forward and set off in the subsequent years:
Loss from house property can be carried forward for eight years and adjusted with income from the house property. Loss from business or profession can be carried forward for eight years and adjusted with income from business or profession for eight years. Loss from capital gains can be carried forward for eight years and adjusted with income from capital gains.
Long-term capital loss can be set off against long-term capital gains only, whereas short-term capital loss can be set off against short-term capital gains or long-term capital gains. Loss from income from other sources arising on account of owning and maintaining race horses can be carried forward for four years only.
The tax returns should be filed within the due date to carry forward the losses, subject to certain exceptions. It should also be ensured that details regarding losses are properly mentioned while preparing the tax returns.
The author is a director in KPMG. The views expressed are personal
http://www.financialexpress.com/news/set-off-your-losses-to-keep-tax-liability-to-the-minimum/1018783/0
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