Are you aware that you can reduce your future tax bills by carrying forward losses from the current year? In India, the income tax system allows individuals and businesses to carry forward tax losses for up to 8 years. This means you can use those losses to reduce your taxable income in future years, leading to lower taxes.
In this easy-to-follow guide, we’ll explain everything you need to know about carrying forward tax losses, how to track them, and how to make the most of them.
What Does “Carrying Forward Tax Losses” Mean?
When you incur a tax loss, it means your expenses or losses are higher than your income for that year. The good news is, the Indian tax system allows you to carry forward certain types of tax losses to future years. This allows you to offset future income with those losses and reduce your tax burden.
For example, if you have a capital loss from selling a property or stocks at a loss, you can carry forward that loss to reduce any capital gains tax you might owe in the future.
How Does Carrying Forward Tax Losses Work?
Here’s how carrying forward tax losses works step-by-step:
- Tax Losses Can Be Used in Future Years: If you have losses this year, you can use them in future years to offset certain types of income, such as salary, business income, or capital gains.
- Filing Your Tax Return on Time is Crucial: To carry forward tax losses, you must file your Income Tax Return (ITR) on time. If you file your ITR late, you may lose the ability to carry forward those losses (except in certain cases like house property losses).
- Track Your Losses: Once you file your ITR, the tax department will issue an intimation order confirming the tax losses you can carry forward. It’s important to keep a record of these losses for future reference.
Why is the Intimation Order Important?
The intimation order is a document that confirms the tax losses accepted by the tax department. This order includes:
- The confirmation of the loss.
- Any adjustments made to your income, deductions, or taxes.
- Whether the return was filed on time or not.
If there were any adjustments to your losses (for example, if an expense was disallowed), the intimation order will show the final adjusted amount that can be carried forward.
If your losses from previous years aren’t mentioned in the current year’s intimation order, you should check the orders for those specific years to ensure you’re aware of all the losses you can use.
What Happens If You File Your ITR Late?
You can still file a belated ITR (late return), but there are restrictions:
- House Property Losses: If you file late, you can still carry forward losses from house property.
- Other Losses: For business losses, speculative losses, and other types of losses, you cannot carry them forward if you file your ITR after the deadline.
For individuals not under tax audit, the last date to file the ITR is July 31 of the relevant assessment year, and for those under tax audit, it’s October 31 of the relevant assessment year. Filing late could also result in penalties, so it’s always best to file your tax return on time.
Types of Losses That Can Be Carried Forward
Different types of tax losses can be carried forward for future use. Let’s look at the most common ones:
Losses from House Property
- Carry Forward Period: Up to 8 years
- Can Offset: Income from house property only
- Filing Requirement: These losses can be carried forward even if you file your return late.
If you have rental income and expenses that exceed the rental income, you can carry forward the resulting loss to offset future rental income.
Business Losses (Non-Speculative)
- Carry Forward Period: Up to 8 years
- Can Offset: Income from the same business or profession
- Filing Requirement: You must file your ITR on time to carry these losses forward.
If you run a business and your expenses are more than your income, you can carry forward these losses to reduce taxable profits in the next 8 years.
Losses from Specified Business (Section 35AD)
- Carry Forward Period: Indefinite
- Can Offset: Income from the same business
- Filing Requirement: Must file ITR on time.
Certain specified businesses, such as those involved in building or operating infrastructure, can carry forward losses indefinitely.
Short-Term Capital Gains Losses
- Carry Forward Period: Up to 8 years
- Can Offset: Both Short-Term and Long-Term Capital Gains
- Filing Requirement: Must file your ITR on time to carry forward these losses.
Long-Term Capital Gains Losses
- Carry Forward Period: Up to 8 years
- Can Offset: long-term capital gains
- Filing Requirement: Must file your ITR on time to carry forward these losses.
If you sold stocks, mutual funds, or property at a loss, you can use these losses to offset future capital gains.
Losses from Speculative Business
- Carry Forward Period: Up to 4 years
- Can Offset: Income from speculative business (like trading in stocks, etc.)
- Filing Requirement: File your ITR on time.
If you have losses from speculative activities, you can carry them forward for up to 4 years to reduce future speculative income.
Losses from Owning and Maintaining Racehorses
- Carry Forward Period: Up to 4 years
- Can Offset: Income from owning and maintaining racehorses
- Filing Requirement: Must file ITR on time.
If you are involved in racehorse activities and incur a loss, you can carry it forward to offset future income from the same activity.
Summary Table: Key Types of Tax Losses You Can Carry Forward
| Type of Loss | Can Offset | Carry Forward Period | Filing Requirement |
| House Property Loss | Income from House Property | 8 Years | Can be carried forward even if the return is filed late. |
| Loss from Business and Profession | Income from Business/Profession | 8 Years | Timely filing of ITR is required to carry forward these losses. |
| Speculative Business Loss | Income from Speculative Business | 4 Years | ITR must be submitted within the due date to carry forward losses. |
| Loss from Specified Business (Section 35AD) | Income from Specified Business | Indefinite | Losses can only be carried forward if the ITR is filed before the deadline. |
| Short-Term Capital Loss | Short-Term and Long-Term Capital Gains | 8 Years | Filing of the ITR within the prescribed timeline is necessary. |
| Long-Term Capital Loss | Long-Term Capital Gains | 8 Years | Ensure ITR is filed on time to benefit from carrying forward these losses. |
| Racehorse Loss | Income from Owning Racehorses | 4 Years | Losses can be carried forward only if the ITR is filed by the due date. |
Final Thoughts: Managing Your Tax Losses Effectively
Understanding how to carry forward tax losses can be a valuable tool for managing your tax liabilities. By offsetting losses against future income, you can reduce the amount of tax you need to pay in the future.
Always remember to file your ITR on time to take full advantage of carrying forward tax losses. Keep track of your losses from previous years, check the intimation order, and make sure that your records are accurate to avoid any discrepancies.
By following these steps, you can better manage your tax situation and ensure you’re using every opportunity to reduce your future tax payments.
