Report No.
PF/HT/151206/87
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15th December 06
A fortnightly refresher on Personal Income Tax
Set-Off & Carry forward
Income under the Income Tax Act is taxable under five heads: 1. 2. 3. 4. 5. Income from salaries Income from house property Income from business or profession Income from capital gains Income from other sources
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It is possible for an individual to have income under more than one head. The Income Tax Act has prescribed rules to set-off loss arising from one head against other heads of income. For example Gauravs salary is Rs.4 lacs p.a. However, he has made a loss of Rs.50,000 on sale of shares (capital loss). The question that arises is whether the loss on sale of shares can be set-off against his salary income.
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The answer to the above question lies in the set-off provisions mentioned in the Income Tax Act. Set-off means the process of reducing ones income using losses under other heads or same head of income. Procedure for setting off losses: Step 1. Set-off loss from same head of income Intersource adjustment
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. 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.
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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A fortnightly refresher on Personal Income Tax
Incomes
Salary
House property
Business/Professional income Nonspeculative
Capital Gains
Other sources Owning and maintenance of race horses Winnings from lotteries crossword puzzles, cards etc.
Speculative
Long Term
Short term
Others
Loss from house property Loss under the head House property
Loss from business/professional income Speculative business loss Other business or professional loss
Loss from capital gains Long term capital loss Short term capital loss
Loss from other sources Loss from owning and maintenance of race horses Loss from card games etc.
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A fortnightly refresher on Personal Income Tax
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 (non-speculative) Number of years 8 8 To be set-off against Income from house property Income from business/profession (nonspeculative) Income from speculative business Income from the same activity Short term or Long term capital gains Long term capital gains
Speculative business loss Loss from activity of owning and maintaining of race horses Short term capital loss Long term capital loss
4 4 8 8
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The information and views presented in this report are prepared by Karvy Stock Broking Limited. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. While acting upon any information or analysis mentioned in this report, investors may please note that neither Karvy nor Karvy Stock Broking nor any person connected with any associate companies of Karvy accepts any liability arising from the use of this information and views mentioned in this document. This report is intended for a restricted audience and we are not soliciting any action based on it.
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