SETOFF AND CARRY FORWARD OF LOSSES SETOFF AND CARRY FORWARD OF LOSSES Procedure for setting off losses:

Step 1. Set-off loss from same head of income Intersource adjustment Step 2. If the loss is still existing, loss can be set-off from other heads of income (subject to certain restrictions) Interhead adjustments Step 3. If loss still persists, the same can be carried forward to the subsequent assessment years Carry forward of losses Step 1 - Inter source adjustment: Under each head of income mentioned, there may be more than one source of income. For example, a person can have two or more businesses under the head Business Income. Under the IT Act, loss from one source of income can be set-off against another source of income under the same head i.e. Loss from a cloth business can be set-off against gain in a catering business. The restrictions to this form of setting off are as follows: a. Loss from speculative business can be set-off only against gain from speculative business and not any other business income. b. Loss from the activity of owning and maintaining race horses can be set-off only against gain arising from the activity of owning and maintaining race horses and not any other income. c. Long term capital loss can be set-off against long term capital gains and not short term capital gains. Step 2 - Inter head adjustment: If the losses cannot be set-off fully through inter source adjustment, they can next be set-off against other heads of income. This is called inter-head adjustment. The IT Act has prescribed specific rules setting off of losses between different heads of income, which are summarized in the following tables:

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SETOFF AND CARRY FORWARD OF LOSSES Intersource adjustment and Interhead adjustments
Incomes House Business/Professional Salary property income Capital Gains Other sources Winnings Others from lotteries crossword puzzles, cards etc.

Nonspeculative Speculative Long Short Owning and Term term maintenance of race horses

Loss from house property Speculative business loss Other business or professional loss Long Term capital Loss

Short Term capital Loss

Loss From Owning and maintenance of race horses Loss from lotteries crossword puzzles, cards etc.

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SETOFF AND CARRY FORWARD OF LOSSES

Step 3 - Carry forward of losses: If still the losses cannot be set-off fully through inter head adjustment, they can be carried forward to the next years.However, the loss so carried forward can be set-off only against same head of income, i.e. the benefit of inter-source adjustment is lost. Nature of loss Loss from house property Business loss (nonspeculative) Speculative business loss Loss from activity of owning and maintaining of race horses Short term capital loss Long term capital loss Number of years 8 8 4 To be set-off against Income from house property Income from business/profession (nonspeculative) Income from speculative business

Income from the same activity

8 8

Short term or Long term capital gains Long term capital gains

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