Set off refers to reducing the income of a year, with expenses or losses, as may be allowed by the income tax act. Losses can be carried forward and set off against income from the same head in a specified number of years after the previous year in which it was incurred. Losses incurred in a previous year can be set off against income earned under the same head or other heads of income, subject to rules. Losses can also be carried forward, to be set-off against income from subsequent years.

  • ­Losses from house property can be set-off against income from other house properties or other income for a period of 8 years.
  • ­Losses from business or profession can be set off against income from the same head or other heads of income. Losses can be carried forward for a period of 8 years.
  • ­Losses from speculative business can be set-off against profits under the same type.

Investors, who make a capital loss from their investments, are allowed to carry forward the loss for eight years from the date of the loss. Investors can deduct the loss that is carried forward, from the capital gains made in the subsequent years reducing the capital gains tax. This act of reducing the capital gains by deducting the capital loss is called set off. The rules for set off are as under:

  • ­Loss arising from a short-term capital asset can be set off against the gains arising from the sale of a long or short-term capital asset.
  • ­Loss arising from a long-term capital asset can be set off only against the gains from the sale of long-term assets.
  • ­Any loss under the head capital gains, either short or long term, can be set off only against income from the same head (capital gains).
  • ­Short or long term capital losses cannot be set-off against any other source of income.

If you do not have relevant background, it is better to work with a tax consultant in case you have any of the above mentioned capital gains. However, this lesson explains you the basic rule that even a tax consultant has to follow.