Income Tax 2025

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Set off of losses under any other head of income. ​

109(1) ​

Subject to the provisions of this Chapter, for any tax year, if income computed under any head of income (other than “Capital gains”) is a loss, such loss shall be set off against income of the assessee under any other head, including “Capital gains”, if any, assessable for that tax year, subject to the following conditions:––

  • (a) loss under the head “Profits and gains of business or profession” shall not be set off against income chargeable under the head “Salaries”; and
  • (b) loss under the head “Income from house property” shall be set off to the extent of two lakh rupees against income under any other head;

109(2) ​

For any tax year, the loss under the head “Capital gains” shall not be set off against income under any other head.

Explanation

Section Summary: ​

This section, 109(1) and 109(2), governs how losses from one head of income can be set off against income from other heads in the same tax year. It provides rules for adjusting losses under specific heads of income, such as "Profits and gains of business or profession," "Income from house property," and "Capital gains," against other taxable income. The section ensures that losses are utilized in a structured manner, with certain restrictions to prevent misuse.

Key Changes: ​

  1. Loss from Business/Profession: Previously, business losses could be set off against any other head of income except salaries. This restriction remains unchanged.
  2. Loss from House Property: A new limit is introduced—losses under "Income from house property" can now be set off against other heads of income only up to ₹2 lakhs in a tax year. Any remaining loss must be carried forward.
  3. Capital Gains Losses: Losses under "Capital gains" cannot be set off against income from any other head, which is a continuation of the existing rule.

Practical Implications: ​

  1. Taxpayers with Business Losses: If you incur a loss in your business or profession, you can set it off against income from other heads (e.g., interest income, rental income) except salaries. This reduces your overall taxable income.
  2. Property Owners: If you have a loss from house property (e.g., due to home loan interest), you can offset up to ₹2 lakhs against other income (e.g., business income, capital gains). Any excess loss must be carried forward to future years.
  3. Investors with Capital Losses: If you incur a loss from the sale of capital assets (e.g., stocks, property), you cannot use this loss to reduce income from other heads like salary or business income. However, you can carry forward the loss to set it off against future capital gains.

Critical Concepts: ​

  1. Heads of Income: Income is categorized under five heads: Salaries, House Property, Business/Profession, Capital Gains, and Other Sources. Losses under one head can often be adjusted against income from another head, subject to restrictions.
  2. Set Off vs. Carry Forward:
    • Set Off: Adjusting losses against income in the same tax year.
    • Carry Forward: Losses that cannot be fully set off in the current year can be carried forward to future years, subject to specific rules.
  3. ₹2 Lakh Limit for House Property Loss: Only ₹2 lakhs of loss from house property can be set off against other income in a year. Any remaining loss must be carried forward for up to 8 years.

Compliance Steps: ​

  1. Document Losses: Maintain proper records of losses incurred under each head of income (e.g., business loss, house property loss, capital loss).
  2. File Accurate Returns: Report losses correctly in your income tax return to ensure they are eligible for set off or carry forward.
  3. Carry Forward Unadjusted Losses: If losses cannot be fully set off in the current year, ensure they are carried forward and utilized in future years as per the rules.

Examples: ​

  1. Business Loss Set Off:

    • Mr. A has a business loss of ₹5 lakhs and salary income of ₹10 lakhs. He can set off the business loss against his salary income, reducing his taxable income to ₹5 lakhs.

  2. House Property Loss Set Off:

    • Ms. B has a loss of ₹3 lakhs from house property and business income of ₹4 lakhs. She can set off ₹2 lakhs of the house property loss against her business income, reducing her taxable income to ₹2 lakhs. The remaining ₹1 lakh loss must be carried forward.

  3. Capital Loss Restriction:

    • Mr. C has a capital loss of ₹2 lakhs from selling shares and salary income of ₹8 lakhs. He cannot set off the capital loss against his salary income. The ₹2 lakhs loss can only be carried forward to set off against future capital gains.

This section ensures that losses are utilized efficiently while preventing misuse, particularly in cases like capital losses and house property losses. Taxpayers must carefully track and report losses to maximize their tax benefits.