Tax: Inter-source adjustments vs inter-head adjustments


Adjusting loss from one head against any gain under the same head is called 'inter-source' adjustment

Taxpayers earn income from salary, house property, business or profession, capital gains and income from other sources. There cannot be a loss from salary and income from other sources. However, we could suffer losses under other heads of income such as loss from house property, business loss and capital loss.

Adjusting loss from one head against any gain under the same head is called 'inter-source' adjustment. For example: You have two businesses 'A' & 'B'. Business 'A' is making a loss, while business 'B' is making profit. Then, the loss from business 'A' can be set-off against profit from business 'B'. Set-off means the process of reducing one’s income using losses under other heads or same head of income.

Similarly, if you have two house properties, one self occupied and the other on rent. Loss from the first property can be adjusted against the income from the second property.

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.

  1. Inter-source adjustment: Setting-off loss under the same head of income.
  2. Inter-head adjustments: If the loss is still existing, loss can be set-off from other heads of income (subject to certain restrictions).
  3. Carry forward of losses: If loss still persists, the same can be carried forward to the subsequent assessment years.

However this inter-source adjustment is subject to certain exceptions listed below:

 

Exception

Description

1

Loss in a speculation business

Loss from speculation business cannot be set-off against any income other than a speculative income.

2

Long term capital loss

Long term capital loss can be set-off against long term capital gains only.

3

Loss from the activity of owning & maintaining race horses

Loss incurred from the activity of owning & maintaining race horses can be set-off only against income from such business & not against any other income.

4

Business loss

Business losses cannot be set-off against salary income

5

Loss cannot be set off against winnings from lotteries, crossword puzzles etc.

A loss under any head of income cannot be set off against winnings from lotteries, crossword puzzles, races (including horse races), card games or any other games of any sort or from gambling or betting of any form or nature.

Except the above five cases, any loss can be set-off against any income from that source. For instance: Loss from house property can be set off against income from any other house property.

Loss from a non speculation business can be set off against income from speculation or non speculation business. Short term capital gain can be set off against any capital gains whether long term or short term.

Income from other sources (except loss from activity of owning & maintaining race horses) can be set off against any income other than winnings from lotteries etc. (Mentioned in exception 5 in the table).

Let's assume: Mr X has the following income from business & profession:

Profit from his professional practice of a lawyer: Rs. 2.5 lakh

Loss from his proprietary business: Rs. 1.75 lakh

Net Income chargeable under Profits & gains from Business & Profession will be Rs. 75,000 (Rs. 2.5 lakh less Rs. 1.75 lakh)

Mr. Y has incurred a Short term capital loss of Rs. 15 lakh and has made a long term capital gain of Rs. 32 lakh:

Net Income chargeable under capital gains head is Rs. 17 lakh (Rs. 32 lakh less Rs. 15 lakh).

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

No. of years

To be set-off against

Loss from house property

8

Income from house property

Business loss (non-speculative)

8

Business loss (non-speculative)

Speculative business loss

4

Income from speculative business

Loss from activity of owning and

maintaining of race horses

4

Income from the same activity

Short term capital loss

8

Short term or Long term capital gains

Long term capital loss

8

Long term capital loss

 



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