Inter-head set off of losses under section 71 (as set, 1961 Act, AY 2018-19)

Set off within a head comes first

A loss from one source is first set off against income from another source under the same head (section 70). Only the net loss of a head after that is dealt with by section 71, which allows it to be set off against income under a different head of the same assessment year.

The general rule of section 71

• Where the assessee has no income under Capital gains, a loss under any other head may be set off against his income under any other head of the same year (section 71(1)).
• Where the assessee also has income under Capital gains, such a loss may be set off against that income too, whether the gain is short-term or long-term (section 71(2)).
• Set off is of the net result of the computation under a head, and it is made against income of the same assessment year; section 71(1) and (2) give the assessee the right to it, subject to the other provisions of the Chapter.

Losses that cannot be set off against other heads

1. Business or profession against salary: a loss under Profits and gains of business or profession cannot be set off against income under Salaries (section 71(2A)); it may be set off against the other heads.
2. Capital gains loss: a loss under the head Capital gains cannot be set off against any other head (section 71(3)). Within the head, in the same year, a short-term capital loss may be set off against any capital gain, and a long-term capital loss only against a long-term capital gain (section 70(2) and (3)); what remains is carried forward under section 74, on the same short-term and long-term lines, for not more than eight assessment years (section 74(1) and (2)).
3. Other restrictions of the Chapter, to which section 71 is subject: a loss from speculation business is set off only against speculation profits (section 73); a loss from a specified business under section 35AD only against profits of such a business (section 73A); a loss from owning and maintaining race horses only against income from that activity (section 74A(3)).

House property loss limited to ₹2,00,000

From assessment year 2018-19, a loss under Income from house property can be set off against income under other heads only up to ₹2,00,000 for the year (section 71(3A), inserted with effect from 1 April 2018 by its footnote). The excess is not lost: it is carried forward under section 71B.

Loss not set off

The part of a loss that cannot be set off under section 71 is carried forward to later years under the sections for each head: house property under section 71B (eight years, against house property income), business under section 72, speculation under section 73 (against speculation profits only, for not more than four assessment years, section 73(4)), specified business under section 73A and capital gains under section 74 (eight years). A business loss carried forward is set off only against profits of a business or profession of the later year (section 72(1)).

Example (our own figures)

For assessment year 2018-19 an individual has salary of ₹9,00,000, a business loss of ₹1,20,000, a loss from a self-occupied house (interest) of ₹2,00,000 and a let-out house loss of ₹1,50,000, and a long-term capital gain of ₹2,00,000.

• House property: the two losses are first combined within the head (section 70): ₹3,50,000. Only ₹2,00,000 can be set off against other heads; ₹1,50,000 is carried forward under section 71B.
• The ₹2,00,000 of house property loss is set off against salary.
• The business loss of ₹1,20,000 cannot be set off against salary; it is set off against the capital gain of ₹2,00,000 (section 71(2)), leaving a gain of ₹80,000.
• Gross total income: salary ₹7,00,000 and capital gain ₹80,000.