Set off and carry forward of losses and assessment of individuals.pptx

income tax

1. INCOME TAX LAW AND PRACTICE II Topic: Set off and carry forward of losses and assessment of individuals Group no. 4

2. Introduction This concept was introduced to provide relief to taxpayers who incur losses in a particular financial year The Set-off and carry forward of loss assist taxpayers to settle the losses they incurred against the income they gained or the profit they made. all the losses do not settle against this year’s profit if the losses are high compared to the gains. In such cases, those losses can be carried forward into the profits of subsequent years.

3. The Rules and Exceptions Capital Normal Business Speculative Business Specified Business House property Other sources

4. UNDERSTANDING SET OFF AND CARRY FORWARD Set off and carry forward of losses are fundamental tax concepts that allow businesses and individuals to offset current year's losses against future profits. This provides crucial financial relief, as it enables taxpayers to smooth out income fluctuations and reduce their overall tax burden over time. The set off of losses allows taxpayers to directly reduce their taxable income in the current year by offsetting eligible losses. Carry forward of losses, on the other hand, permits the taxpayer to claim the unused losses in subsequent years, providing long-term tax benefits.

5. CONDITIONS Losses must be incurred in a business or profession to be eligible for set off and carry forward. ​ The business or profession must be continued in the year the loss is to be set off or carried forward. ​ There must be sufficient taxable income in the year of set off to utilize the losses. ​ The losses must be computed correctly and claimed within the prescribed time limits. ​ Certain restrictions and limitations may apply based on the type of loss and the taxpayer's situation. ​

6. SET OFF Set off of losses means adjusting the losses against the profit/income of that particular year. Losses that are not set off against income in the same year, can be carried forward to the subsequent years for set off against income of those years. A set-off could be: 1. An intra-head set-off 2. An inter-head set-off

7. An intra-head set-off The losses from one source of income can be set off against income from another source under the same head of income. Exceptions to an intra-head set off: 1. Losses from a Speculative business will only be set off against the profit of the speculative business. One cannot adjust the losses of speculative business with the income from any other business or profession. 2. Loss from an activity of owning and maintaining race-horses will be set off only against the profit from an activity of owning and maintaining race-horses. 3. Long-term capital loss will only be adjusted towards long-term capital gains. Interestingly, a short-term capital loss can be set off against long-term capital gain or short-term capital gain. 4. Losses from a specified business will be set off only against profit of specified businesses. But the losses from any other businesses or profession can be set off against profits from the specified businesses.

8. An inter-head set-off After the intra-head adjustments, the taxpayers can set off remaining losses against income from other heads. Few losses in set-off: 1. Loss from House property can be set off against income under any head 2. Business loss other than speculative business can be set off against any head of income except income from salary.

9. CARRY FORWARD OF LOSSES After making the appropriate and permissible intra-head and inter-head adjustments, there could still be unadjusted losses. These unadjusted losses can be carried forward to future years for adjustments against income of these years. The rules as regards carry forward differ slightly for different heads of income. These have been discussed here: Losses from House Property: Can be carry forward up to next 8 assessment years from the assessment year in which the loss was incurred Can be adjusted only against Income from house property Can be carried forward even if the return of income for the loss year is belatedly filed.

10. Losses from Non-speculative Business (regular business) loss: Can be carry forward up to next 8 assessment years from the assessment year in which the loss was incurred. Can be adjusted only against Income from business or profession. Not necessary to continue the business at the time of set off in future years. Cannot be carried forward if the return is not filed within the original due date. Speculative Business Loss: Can be carry forward up to next 4 assessment years from the assessment year in which the loss was incurred. Can be adjusted only against Income from speculative business. Cannot be carried forward if the return is not filed within the original due date. Not necessary to continue the business at the time of set off in future yearly.

11. N Capital Losses: Can be carry forward up to next 8 assessment years from the assessment year in which the loss was incurred. Long-term capital losses can be adjusted only against long-term capital gains. Short-term capital losses can be set off against long-term capital gains as well as short-term capital gains. Cannot be carried forward if the return is not filed within the original due date. Losses from owning and maintaining race-horses: Can be carry forward up to next 4 assessment years from the assessment year in which the loss was incurred. Cannot be carried forward if the return is not filed within the original due date. Can only be set off against income from owning and maintaining race-horses only.

12. Advantages on Set Off and Carry Forward of Losses Immediate Relief: Set off allows you to deduct losses from one income source against income from other sources in the same year. This directly reduces your taxable income and lowers your tax liability for the current assessment year. Spreading the Burden: Carry forward allows you to utilize unutilized losses in future years. This helps spread the impact of a loss over multiple years, reducing your tax burden in those years. Imagine experiencing a bad business year. Risk Mitigation: The ability to carry forward business losses provides a safety net for new entrepreneurs. If your business experiences initial losses, you know you can utilize them to offset future profits, reducing the financial risk associated with starting a business. Long-Term Investment: Carry forward of capital losses incentivizes long-term investment in stocks and other capital assets. Knowing you can offset potential losses against future capital gains encourages holding onto investments for the long term, which can be beneficial for overall wealth creation.

13. Limitations on Set Off and Carry Forward of Losses Time Limits: Losses can only be carried forward for a specific number of years, typically 8 years. Unabsorbed losses beyond this period may not be eligible for set off.​ Restrictions by Income Source​: Certain types of losses, such as speculation losses or capital losses, can only be set off against specific sources of income. They cannot be freely set off against all income.​ Ownership Changes: ​ Significant changes in the ownership of a business may result in the loss of the ability to carry forward and set off earlier losses.​ Minimum Alternate Tax (MAT) ​: The application of Minimum Alternate Tax (MAT) can limit the utilization of carried forward losses, as it is based on the company's book profits rather than taxable income.​

14. Differences Between Set Off and Carry Forward of Losses​ BASIS SET OFF CARRY FORWARD TIME This benefit is utilized in the same assessment year that the loss is incurred. Imagine you experience a business loss in 2024. Set off allows you to deduct that loss from your income from other sources in your 2024 tax filing. This benefit is used in future assessment years if the loss cannot be fully set off in the current year. Continuing with the example above, if your business loss in 2024 is substantial and cannot be offset entirely by your salary income. APPLICABILITY Applicable to losses from various heads of income (like business, house property, capital gains), allowing you to offset them against income from other heads in the same year. Applicability depends on the type of loss. For example, business losses and long-term capital losses can be carried forward for up to 8 years, while short-term capital losses can only be carried forward to the next year.

15. A SSESSMENT OF INDIVIDUALS Various forms of assessment: 1. Self Assessment The assessee himself determines the income tax payable. The tax department has made available various forms for filing income tax return. The assessee consolidates his income from various sources and adjusts the same against losses or deductions or various exemptions if any, available to him during the year. The total income of the assessee is then arrived at. The assessee reduces the TDS and Advance Tax from that amount to determine the tax payable on such income. Tax, if still payable by him, is called self assessment tax and must be paid by him before he files his return of income. This process is known as Self Assessment. 2. Summary Assessment It is a type of assessment without any human intervention. In this type of assessment, the information submitted by the assessee in his return of income is cross-checked against the information that the income tax department has access to. In the process, the reasonableness and correctness of the return are verified by the department. The return gets processed online, and adjustment for arithmetical errors, incorrect claims, disallowances etc are automatically done. Example, credit for TDS claimed by the taxpayer is found to be higher than what is available against his PAN as per department records. Making an adjustment in this regard can increase the tax liability of the taxpayer.

16. m Impact on Tax Liability Directly reduces your taxable income for the current year, leading to a lower tax liability for that specific assessment year. Doesn't directly impact the current year's tax liability. However, it allows you to reduce your taxable income in future years, potentially leading to lower tax liabilities in those years Analogy Can use them immediately to reduce your bill at the checkout counter (current year). Like receiving store credit for a returned item. You can't use it immediately, but you can hold onto it and use it towards future purchases (future years). Benefits Set off offers immediate benefits in the current year Carry forward provides a safety net for future years.

17. n 3. Regular Assessment The income tax department authorizes the Assessing Officer or Income Tax authority, not below the rank of an income tax officer, to conduct this assessment. The purpose is to ensure that the assessee has neither understated his income or overstated any expense or loss or underpaid any tax. If an assessee is subject to a scrutiny assessment, the Department will send a notice well in advance. However, such notice cannot be served after the expiry of 6 months from the end of the Financial year, in which return is filed. 4. Income Escaping Assessment When the assessing officer has sufficient reasons to believe that any taxable income has escaped assessment, he has the authority to assess or reassess the assessee's income. The time limit for issuing a notice to reopen an assessment is 4 years from the end of the relevant Assessment Year. Some scenarios where reassessment gets triggered are given below. The assessee has taxable income but has not yet filed his return. The assessee, after filing the income tax return, is found to have either understated his income or claimed excess allowances or deductions. The assessee has failed to furnish reports on international transactions, where he is required to do so.

18. Importance of Assessment of Individual for Set Off and Carry Forward of Losses Optimized Tax Planning​: Careful assessment of an individual's financial situation allows for effective tax planning by leveraging set off and carry forward of losses.​ Maximize Tax Savings​: Properly claiming and managing losses can significantly reduce an individual's overall tax burden, leading to tangible financial benefits.​ Informed Decision Making​: Understanding the intricacies of set off and carry forward of losses empowers individuals to make informed choices about their business and investment strategies.​ Compliance and Audit Readiness​: Accurate assessment and documentation of losses is crucial for ensuring compliance with tax laws and being prepared for potential audits.​

19. Provisions of set off and carry forward of losses Loss from Salary: In case of income from salary, losses does not arise. Therefore no question of set-off or carry forward arises. Loss from HP: Losses from HP can be set-off against from other HP or any other head of income except casual income. Unabsorbed loss from HP can be carry forward for 8 years and such carry forward loss can be set-off against income from HP only. Loss from business or profession: It can be set-off against any business or speculative income business or any other head and income except salaries and casual income. Unabsorbed loss from business or profession can be carry forward for 8 years and such carry forward loss can be set-off against any business or profession income.

20. 4. Loss from speculation business: It can be set-off against income from speculation business only. Unabsorbed loss from speculative business can be carry forward for 4 years and such carry forward loss can be set-off against speculation business income only. 5. Loss from long term capital assets (LTCG): It can be set-off against long term capital gain only. Unabsorbed loss from long term capital gain can be carry forward for 8 years such carry forward loss can be set-off against long term capital gain only. 6. Loss from short term capital asset (STCG): It can be set-off against long term capital gain and short-term capital gain only. Unabsorbed loss from short term capital gain can be carry forward for 8 years and such carry forward loss can be set-off against LTCG or STCG.

21. 7. Loss from other sources: Loss under the head income from other sources can be set-off against any income under any head. But such loss cannot be carried forward. 8. Loss from owning and maintaining of race horse: It can be set-off against same source of income only. If unabsorbed loss arise it can be carried forward for 4 years and such carry forward loss can be set-off against the same source of income only. 9. Depreciation: Unabsorbed depreciation can be set-off against income from business or profession or any other heads of income (except salary). Unabsorbed depreciation carried forward for indefinite no. of years and set-off against business or profession income only. The amount of unabsorbed depreciation shall be carried forward, irrespective of the fact that the business or assets to which it relates exists or not Other points relating to set-off and carry forward.