Set off and carry forward of losses refer to the provisions in tax laws that allow taxpayers to utilize their business losses or capital losses to offset against their taxable income in a given year or carry forward those losses to future years for set off against future profits. This helps in reducing the tax liability of taxpayers and provides relief for periods of financial loss.
Set off of Losses
- Set off refers to the process of offsetting losses against taxable income in the same year.
- Tax laws allow taxpayers to set off their losses against income earned under different heads. Example: Business losses can be set off against income from other businesses or professions.
- There are two types of set off:
- Intra-head set off: Losses under a particular head of income can be set off against income under the same head in the same year. Example: Long-term capital losses can be set off against long-term capital gains in the same year.
- Inter-head set off: Losses under one head of income can be set off against income under a different head of income in the same year. Example: Business losses can be set off against salary income.
- The specific rules for set off depend on the type of loss and the tax laws of the jurisdiction.
Carry Forward of Losses
- If the losses cannot be fully set off against income in the same year, tax laws often allow taxpayers to carry forward the unabsorbed losses to future years.
- Carried-forward losses can be utilized to reduce taxable income in subsequent years.
- The duration for which losses can be carried forward varies between jurisdictions, typically ranging from 5 to 8 years.
- The carried-forward losses can be set off against future profits earned under the same head of income in subsequent years.
- Some tax laws may also allow the carry forward of losses to be set off against income under different heads in future years.
- However, there may be limitations or conditions on the utilization of carried-forward losses, such as caps on the amount that can be set off in a given year or specific record-keeping and tax filing requirements.
