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Tax Tip - Tell me "How can I set off my losses to reduce my taxes?"

Can I use losses in financial transactions to reduce my tax liability?

Yes! Therefore, don't be disappointed if some of your investments end up in a loss. You can set off losses you suffer against some other income that you have earned. As a result, you can actually reduce your tax liability.

How does this concept of set off of losses work?

Your total income is calculated by adding up your income from various sources such as salary, rental income, interest income and so on. But, what if there is a loss from a particular source?

Well, such a loss can be set off against some other income earned from the same source. If no income from the same source exists, then such a loss can be set off against income earned from some other source. And, if it cannot be set off in the current year, then such a loss can be carried forward to future years and is allowed to be set off against future income.

Can I set off any loss with any income I have?

No! The Income Tax Act has rules according to which set off of losses is allowed. Here are the rules for some important sources of income.

• Loss from House Property: Interest paid on housing loan is allowed as deduction. This often results in negative income from house property or loss from house property. This loss can be set off from any source of income. If no other income exists, such loss can be carried forward to future years.
• Business Losses: Losses of business from one source can be set off against business gains from another other source. Further, if no other business income exists, then the business loss can be setoff against any other source of income. However, business losses cannot be set off against salary income.

  Lets take an example: Vikram, a doctor employed at a hospital, earns a salary of Rs.6 lakhs. He also has his own part time medical practice and has sustained a loss of Rs.2 lakhs in this practice. The business loss of Rs.2 lakhs cannot be set off from salary income and must be carried forward to future years.

• Capital Loss: Losses on sale of properties, shares etc. are termed as capital loss. Depending on the holding period of your investment, losses may be long term or short term. Capital losses cannot be setoff against any other source of income. Further, short term losses can be set off against short term as well as long term capital gains. But long term capital losses can be set off against long term capital gains only. If set off is not possible then such losses can be carried forward to future years.

How will the set off be allowed if there is no income or gain in the next year?

If there is no income or gain in the next year, then the loss can be carried forward to into future years up to a maximum of 8 years.

Is it compulsory to file an income tax return (ITR) to carry forward losses to future years?

Yes, it is. To claim carry forward of losses you must file your ITR and that too on or before the due date of filing return. If the ITR is not filed accordingly, the losses are not allowed to be carried forward. The good news is that the loss from house property can be carried forward even if your ITR is filed late or not filed at all.

Is there any specific field in the ITR where losses to be carried forward are required to be mentioned.

Yes, there is a specific section in the ITR forms regarding carry forward and set off of losses.

Lets take an example: Ram has salary income of Rs.2 lakhs and a loss from house property of Rs.5 lakhs. The loss of Rs.5 lakhs shall first be set off against the salary income of Rs.2 lakhs. The balance loss of Rs.3 lakhs can be carried forward to future years.

Below is a snapshot of the relevant section of the ITR form reflecting how the above loss be shown in the ITR form.

Now lets assume in the next year Ram has rental income of Rs.5 lakhs and does not have any other income. The snapshot below reflects how in the following year the brought forward loss of Rs.3 lakhs can be adjusted against rental income.

As shown above, the set off and carry forward of losses allow Ram to reduce his tax liability.

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