Set off of Income

As per the Income tax act, Income is not only what has been earned but also what is lost. We will call what is lost as negative income. Therefore the income tax act has specific provisions regarding this negative income. In certain cases it is set off against Income, in some cases it is carried forward to the next financial year. Only those negative incomes which are chargeable to tax can be set off or carried forward. Of course there are restrictions, but this is only to avoid misuse of these specific provisions. Under the Income tax act Income earned is divided into the following 5 heads:
• Salary
• House Property,
• Business
• Capital Gains
• Other Sources

Each of these heads has specific rules for computation of Income. So based on these rules Salary and Other sources cannot have negative income. So that leaves us with only House Property, Business and Capital gains.

Within each of these heads you can have multiple sources of Income. When you have a positive Income as well as negative income under the same head of Income, and you set them of against each other it is called Intra head set off. As per the Income Tax Act any negative Income should always be set off against the same head. The exception to this is capital gains. As you are aware capital gains is of 2 types long term and short term. Long term capital gains cannot be setoff against short term capital gains.

Now what happens if you have negative income in a particular head of Income which cannot be setoff using intra head setoff? In such cases we can set it off against income from another head. This is called Inter head set off. As there are exceptions in Intra head set off, there are restrictions in Inter head set off as well. First negative income from Business cannot be setoff against Income from salary. Second capital gains cannot be setoff against any other head of Income.

Even after this setoff if there is still some negative Income it can be carried forward to the next financial year. Of course next year the same rules as mentioned above apply. Also there is a limit till when this can be carried forward, currently it is 8 years. Again this also comes with a condition i.e. returns for negative Income has been filed in time as per the Income Tax act.

So to summarize
Income from House Property: can have Intra head as well as Inter head set off.
Income from Business: can have Intra head setoff, but Inter head setoff cannot be done against Income from Salary
Income from Capital Gains: Short term capital gains can only have Intra head setoff. Long term capital gains can have only Intra head setoff against long term capital gains.