What is meant by a offset/set-off of losses?
Losses incurred in a financial year can be:
Set off against profits/ income earned during the year
Carried forward to be claimed against profits/ income earned in the subsequent years.
A Set off of losses involves adjusting the losses incurred in a year against profits/ income earned in that particular year. A set off can be either:
1. An Intra-head set off: This allows losses from one source of income to be set off against income from another source, under the same income head.
For example, losses incurred by a business from activity A can be set off against profits earned from activity B, under the same income head (business income).
Exceptions to Intra-head Set-offs:
- Losses from a speculative business (such as a loss on intraday equity trading), can only be set off against profit from a speculative business. One cannot adjust the losses of a speculative business with income from any other business/ profession.
- A long-term capital loss can only be set off against Long Term Capital Gain (LTCG).
- A short-term capital loss can be set off against both LTCG and Short Term Capital Gain (STCG).
2. An Inter-head set off: It is used after intra-head adjustments have been made. Taxpayers can set off remaining losses, if any, against other heads of income from the same year. Business losses (other than a loss from a speculative business) can be set off against any income head, except salary income.
For example, losses incurred from house property can be set off against any income (other than salary income).
Exceptions to Inter-head set offs:
- Speculative business losses must be set-off against profit from speculative businesses.
- Capital losses must be set-off against capital gains.