Rules for Set-off of Losses
Introduction
Set-off refers to adjusting losses against profits either from the same source/head of income (intra-head adjustment) or from different heads of income (inter-head adjustment) during the same assessment year. If full adjustment isn’t possible, losses may be carried forward to future years for adjustment against eligible profits.
Key Rules for Set-off
- Intra-Head Adjustment (Section 70): Losses are first adjusted against income within the same head, e.g., business loss against business income.
- Inter-Head Adjustment (Section 71): If losses remain after intra-head adjustment, they can be adjusted against income under other heads, except specified restrictions.
General Rules
- Mode of Set-off:No particular mode of set-off has been prescribed by the income-tax law. In absence of any particular mode of set-off, the assessee is entitled to claim a set-off which is most beneficial. [Circular No 26, Dated 07-07-1955]
- Current Year Priority: Current year losses take precedence over carried-forward losses.
- Concessional Tax Regimes: Under sections like115BA, 115BAA, etc., losses or unabsorbed depreciation attributable to disallowed deductions under the regime cannot be set-off or carried forward.
- Clubbing Provisions: Losses can be set-off against clubbed income included in the total income.
Restrictions on Set-off
Losses cannot be set-off against:
- Undisclosed income discovered during search, requisition or survey (Section 79A).
- Income from gambling, betting, or lotteries (Section 115BB).
- Unexplained income (Section 115BBE).
- Income from virtual digital assets (Section 115BBH).
- Specified income of trust/institutions income (Section 115BBI).
- Winnings from online games (Section 115BBJ).