Income tax returns: Forgetting to file returns for your losses by due date may cost you dearly
If you do not file your returns by the due date, the losses that otherwise could be carried forward cannot be.
Losses, like any other depressing development in one’s life, are best forgotten lest they haunt you every time you want to shake them off and move forward by making a new beginning. But you can forget the last date for filing return of losses only at your peril. Losses are valuable from the income tax point of view. Does it sound a bit like an oxymoron? Well, it might, but the point is if you have incurred losses during the financial year just ended namely 2017-18 for which the last default date for filing returns for individuals is 31 July 2018, you have to hurry up.
If you do not file your returns by the due date, the losses that otherwise could be carried forward cannot be. That would be aggravating or compounding your losses because when you carry forward your losses, you reduce your future tax bills.
Suppose your salary income is Rs 6 lakh and loss from your house which you have let out is Rs 8 lakh, then you cannot carry forward the unabsorbed loss of Rs 2 lakh to the future eight years as you are otherwise allowed to if you did not file your returns by 31 July 2018. To be sure, even if you file your returns one month late, there would be no tax for you for the financial year 2017-18 because the loss of Rs 8 lakh from the property would abate against the salary income of Rs 6 lakh to that extent. But the only adverse consequence would be the loss of Rs 2 lakh that couldn’t be absorbed by your salary income. This could have been avoided if you were a little vigilant and filed the returns by the due date, i.e.: 31 July 2018.
If you had filed your returns by the due date, then the unabsorbed house property loss of Rs 2 lakh can be carried forward to the assessment year 2019-20 and set off against your income from house property of that year. And if in AY 2019-20 there is no positive income from house property the loss can be carried forward to AY 2020-21 and so on subject to the condition that the loss cannot be carried forward beyond the eighth year from the AY in which the loss was incurred.
Remember, the carried forward house property loss can be set off only against house property income which is the normal principle of set off of brought forward losses---brought forward losses can be set off only against income under the same head. The freedom to set off the house property loss against salary income is available only in the initial year, i.e.: in the financial year in which it was incurred.
What about losses incurred against other heads of income? You could be moonlighting, i.e.: running a shop after office hours to augment your income. Suppose your salary is Rs 8 lakh per annum and loss from your small business is Rs 2 lakh, what is the bottom line? Well, nothing to cheer you immediately because the Income Tax law says a business loss cannot abate against salary income. Why? Because there was a widespread practice on the part of company honchos to reduce their tax bill on their hefty salaries by cooking up business losses.
Manmohan Singh in his avatar as finance minister in the Narasimha Rao government in the early nineties put paid to such devious stratagem by peremptorily saying that losses from a business cannot be set off against income from salary, period. Any peremptory law hits the honest as much as it hits the dishonest. So even if you have a genuine business loss that cannot abate against your salary, what you can do is to file your return on time, i.e., by 31 July 2018 and carry forward the small business loss of Rs 2 lakh to the next assessment year 2019-20 and so on subject to a maximum of eight assessment years during which period the brought forward loss has to be set off against business income alone.
But if you have income from other sources of say Rs 3 lakh in the financial year 2017-18, the loss from small business of Rs 2 lakh can abate against it. The prohibition against set off of the business loss of the current year is only against salary.
There can be losses under the head capital gains as well. The law is even more peremptory and stricter. Short-term capital losses can be set off against any capital gains short-term or long-term either during the same year or within the next eight years but long-term capital losses can be set off only against long-term capital gains either in the same year or within the next eight years. Truly, capital losses are sequestered and kept in the doghouse thanks once again to Manmohan Singh who suspected that capital losses are even easier to cook up. Be that as it may, the point you must remember is if you want to carry forward capital losses, better file return by the last date for filing returns.
(The writer is a senior columnist and tweets @smurlidharan)
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