The current Income-tax Act, 1961 and the upcoming Income-tax Bill, 2025 contain several restrictions for set-off, like business loss is not permitted to be set-off against salary income, capital losses are not permitted to be set off against income under any other head, loss from house property can be set-off against income under any other head only to the extent of Rs.2 lakh and so on.
Impact : Due to such restrictions, the taxpayer is put to hardship since he has to pay the taxes even though he has incurred losses.
Proposal
In order to address this concern, it is suggested that inter-head set-off of losses be permitted without restriction, with the exception in cases of certain losses, like losses from speculation business or losses from the activity of owning and maintaining race horses or online gaming, which may be spelt out as exceptions. This would be in line with the principle of taxation of real income after set-off of losses and would relieve the burden of the taxpayers. This would also simplify the complex set-off provisions spread across many clauses of the Bill.
Special Rules for Capital Losses
In case of capital losses:
- long-term capital loss would have to be first set-off against long-term capital gains, then, against short-term capital gains and the balance against other income;
- short-term capital loss would have to be first set-off against short-term capital gains, then, against long-term capital gains and the balance against other income.
Accordingly, the new section combining the provisions of sections 108 to 112 of the Income-tax Bill, 2025 may be as given below -
108. Set-off and carry forward of losses
(1) Unless provided otherwise in this Act, for any tax year, if net result of computation from any source under any head of income 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.
(2) Subject to the provisions of this Chapter, for any tax year, if income computed under any head of income is a loss, such loss may be set off against income of the assessee under any other head, subject to the following conditions:—
(i) Loss under the head “capital gains” arising from transfer of a long-term capital asset shall be first set-off against capital gains, if any, from transfer of any other long-term capital asset during the tax year;
(ii) Loss under the head “capital gains” arising from transfer of a short-term capital asset shall be first set-off against capital gains, if any, from transfer of any other short-term capital asset during the tax year;
(iii) Loss, if any, under the head “capital gains” after set-off as per (i) and (ii) above shall be set-off against capital gains from transfer of any capital asset; and
(iv) Loss, if any, under the head “capital gains” after set-off as per (i), (ii) and (iii) above may be set-off against income under any other head.
(3) The unabsorbed loss under any head for any tax year shall be carried forward to the subsequent tax year, and shall be set-off against income under the same head, if any, computed for such subsequent tax year, and so on.
(4) The unabsorbed loss referred to in (3) above shall be carried forward to the following tax year, not being more than eight tax years immediately succeeding the tax year in which such loss was first computed.
(5) Notwithstanding anything contained in preceding sub-sections –
(a) Any loss computed from a speculation business referred to in section 113 carried on by the assessee, during any tax year, shall be set off only against profits and gains, if any, of another speculation business for the said tax year.
(b) Any loss computed from a specified business referred to in section 114 carried on by the assessee, during any tax year, shall be set off only against profits and gains, if any, of any other specified business for the said tax year.
(c) Any loss incurred by the assessee in the specified activity referred to in section 115 during any tax year, shall not be set off against the income, if any, from any source other than specified activity for the said tax year.
(d) The carry forward of unabsorbed losses of speculation business, specified business and specified activity shall be governed by the provisions of sections 113, 114 and 115, respectively.
(e) No loss can be set off against income chargeable under section 194 [Sr. No. 1, Sr. No. 4 and Sr. No. 5 of the Table thereunder].
(f) Only the loss which has been determined in pursuance of return filed in accordance with the provisions of Section 263 shall be carried forward to subsequent years subject to fulfilment of conditions laid down in this section and the provisions of this Chapter.
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