Intra-head Set-Off of Loss

Set-off of losses is an essential tax planning strategy that helps taxpayers minimize their tax liability by adjusting losses against taxable income. Under Section 70 of the Income Tax Act, 1961, taxpayers are allowed to set off losses from one source of income against gains from another source within the same head of income. This provision is particularly beneficial for businesses and investors who deal with multiple income streams under the same category.

Understanding Section 70 of the Income Tax Act

1. General Provision for Set-Off
According to Section 70(1), if a taxpayer incurs a loss from one source under a specific head of income (except capital gains), they can adjust this loss against income from another source within the same head. This ensures that taxpayers are taxed only on their net income after accounting for intra-head losses.

Example:
If an individual earns Rs. 10,00,000 from a salary but incurs a loss of Rs. 2,00,000 from house property (rental income), they can set off this loss against rental income earned from another property.

2. Set-Off of Short-Term Capital Losses
Section 70(2) allows the set-off of short-term capital losses against short-term or long-term capital gains. However, short-term capital losses cannot be adjusted against income from other heads such as salary or business income.

Example:
If a taxpayer incurs a short-term capital loss of Rs. 50,000 from stock trading and earns a short-term capital gain of Rs. 1,00,000 from the sale of mutual funds, they can offset the loss and pay tax only on the net capital gain of Rs. 50,000.

3. Set-Off of Long-Term Capital Losses
Under Section 70(3), long-term capital losses can only be set off against long-term capital gains. They cannot be adjusted against short-term capital gains or income from other heads.

Example:
If a taxpayer incurs a long-term capital loss of Rs. 1,00,000 from the sale of property and earns a long-term capital gain of Rs. 2,50,000 from the sale of equity shares, they can set off the loss and pay tax only on the net capital gain of Rs. 1,50,000.

Key Points to Remember

• Losses from business income can be set off against profits from another business under the same head.

• Short-term capital losses can be set off against both short-term and long-term capital gains.

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

• Losses under “Income from Other Sources” (such as interest or lottery winnings) can be set off against similar sources under the same head.

• Capital losses cannot be set off against salary or income from house property.

Conclusion

Understanding the provisions of Section 70 of the Income Tax Act allows taxpayers to effectively manage their tax liabilities by utilizing set-off provisions. Proper tax planning can help individuals and businesses optimize their tax burden and improve overall financial management. Consulting a qualified Chartered Accountant can ensure compliance with income tax laws and maximize tax benefits through legitimate loss adjustments.