Income Tax 2025

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CHAPTER VII

SET OFF, OR CARRY FORWARD AND SET OFF OF LOSSES

Set off of losses under the same head of income. ​

108(1) ​

Unless provided otherwise in this Act, for any tax year, if net result of computation from any source under any head of income (other than “Capital gains”) is a loss, then assessee shall be entitled to set off such loss against his income from any other source under the same head for that tax year.

108(2) ​

Any loss, as a result of computation made under sections 72 to 90, for any tax year, arising from transfer of a capital asset as arrived at under a similar computation made for the tax year in respect of any other capital asset being,––

  • (a) a long-term capital asset, shall be set off only against gains, if any, from transfer of another long-term capital asset; and
  • (b) a short-term capital asset, shall be set off against gains, if any, from transfer of any capital asset.
Explanation

Section Summary: ​

This section deals with the set-off of losses under the same head of income. It allows taxpayers to adjust losses incurred from one source of income against gains from another source within the same head of income (e.g., business losses against business profits). However, specific rules apply to capital gains, where losses from the transfer of capital assets must be set off against gains from similar types of capital assets (long-term or short-term).

Key Changes: ​

  1. Clarification on Capital Gains Loss Set-Off: The section explicitly states that losses from long-term capital assets can only be set off against gains from other long-term capital assets, while losses from short-term capital assets can be set off against gains from any capital asset (long-term or short-term).
  2. Exclusion of Capital Gains from General Set-Off: Losses under the head "Capital Gains" are treated separately and cannot be set off against income from other heads (e.g., business income or salary).

Practical Implications: ​

  1. Taxpayers with Capital Gains: Taxpayers must carefully segregate their capital gains into long-term and short-term categories when setting off losses. This ensures compliance with the specific rules for each type of capital asset.
  2. Business Income: Losses from one business can still be set off against profits from another business under the same head of income, as per general rules.
  3. Compliance Burden: Taxpayers need to maintain detailed records of capital gains and losses to ensure proper set-off calculations.

Critical Concepts: ​

  1. Head of Income: Refers to the categories under which income is classified (e.g., salary, house property, business/profession, capital gains, other sources).
  2. Long-Term Capital Asset (LTCA): An asset held for more than 36 months (or 12/24 months for certain assets like listed shares, mutual funds, etc.).
  3. Short-Term Capital Asset (STCA): An asset held for 36 months or less (or 12/24 months for certain assets).
  4. Set-Off: Adjusting losses against gains to reduce taxable income.

Compliance Steps: ​

  1. Categorize Losses: Identify whether the loss is from a long-term or short-term capital asset.
  2. Match Losses with Gains: Set off long-term capital losses only against long-term capital gains. Short-term capital losses can be set off against both short-term and long-term capital gains.
  3. Maintain Records: Keep detailed documentation of capital gains and losses, including holding periods and asset types, to support set-off claims.

Examples: ​

  1. Long-Term Capital Loss: Suppose a taxpayer incurs a loss of ₹1 lakh from the sale of a long-term capital asset (e.g., land held for 5 years). This loss can only be set off against gains from another long-term capital asset (e.g., gains from selling shares held for 2 years).
  2. Short-Term Capital Loss: If a taxpayer incurs a loss of ₹50,000 from the sale of a short-term capital asset (e.g., shares held for 6 months), this loss can be set off against gains from any capital asset, whether long-term or short-term.
  3. Business Loss: A taxpayer with a loss of ₹2 lakh from one business can set it off against profits of ₹3 lakh from another business under the same head of income (business/profession).