5 rules to follow to set off loss against profit
5 Basic Rules A Taxpayer Must Follow While Making Adjustments capital loss The five rules against capital gains are as follows:
a) Loss from exempt source should be adjusted against exempt income only.
b) There is intra-head adjustment and intra-head adjustment between different heads of income. Intra-head adjustment should be done first, and then inter-head adjustment. Intra-head adjustment means that if the taxpayer has suffered loss from one source under a particular head, he is allowed to set it off against income from another source under the same head. For example, if you have 3 house properties and one of them suffers a loss, this loss can be set off against income from the other 2 house properties (such as rental income). The differential head adjustment is about adjusting losses from one head of income (for example, business income) to another head of income (eg, capital gains).
c) The unabsorbed depreciation in the business and profession is completely separate from the loss of business or any other loss.
d) Loss arising from speculative business (such as intra-day trading in shares) cannot be set off against any income other than speculative income,
e) No damages can be made against income from lottery winnings, races including horse racing, card games, and any other games, gambling, crypto income, etc.
Types of Losses to Taxpayers
Generally, an individual taxpayer has to face two types of loss in computing his income. One is the house property loss, and the other is the capital loss arising from the sale of the asset. Loss from house property can be adjusted against any other head up to Rs.2 lakh. The remaining loss can be carried forward for the next 8 years, which can only be adjusted against the income from the house property in future years.
However, the rules regarding capital loss are not so straightforward. Loss under this head cannot be set off against income from any head (such as salary, other sources etc.) other than income from capital gains. Depending on the length of the holding period of the asset, capital gains can be of two types- long term capital gains (LTCG) and short-term capital gains (STCG). Long term capital loss should be set off only against the income from long term capital gains. However, short term capital loss can be set off against long term capital gains as well as income from short term capital gains. In short, the long absorbs the short.
It is possible that the entire amount of capital loss may not be absorbed to make up for the loss incurred in a year. This occurs when the amount of loss exceeds the profit. In that case, such loss is allowed to be carried forward to the next 8 assessment years. However, carry forward losses can only be adjusted against income from capital gains.
Things to keep in mind while claiming set-off
3 things to keep in mind while claiming set off forward loss, One, the year in which such loss has occurred should be re-verified to see whether it is within the limit of 8 years from the base year in which the loss occurred. Two, whether the amount of loss has been reduced in the assessment in any year and whether such adjustment has reached finality. and third, whether the base year return was filed within the due date for filing ITR for a particular class of taxpayers.
In case, you were subject to income tax inquiries such as search and survey and as a result your undisclosed income is detected, then any loss of any kind cannot be set off against such undisclosed income.
How to do Claim set-off in ITR form
Such profit and loss is required to be reported and set off in the ITR. This is to be reported in Schedule – CG of the ITR Form.
Once you know the various sources of income, you need to select the appropriate ITR form as applicable. An individual has to feed the information in the column relating to capital gain/loss for calculation. The details you need to enter are the full value of the idea (sale price), date of sale, cost of acquisition and acquisition date and any other relevant details/expenses, as applicable.
If you are claiming deduction for capital gains (for example, deduction under section 54), you will also need to file relevant details. It is important to feed the correct details and then re-verify and confirm such details before submitting the ITR. It is advisable to calculate income and loss in rough working before entering the information in ITR form.
(The author is a former IRS officer and founder, TaxBuddy.com)