Step 3: Set-off the losses of the current year or earlier years
If the assessee has incurred losses under any head of income then he is allowed to make the
following adjustments subject to relevant provisions relating to set-off and carry forward of
losses:
a) Intra-head adjustment, i.e., set-off of losses from one source of income against income
from another source taxable under the same head of income.
b) Inter-head adjustment, i.e., set-off of losses from one head of income against income
taxable under another head of income.
If losses cannot be set-off in the same year due to inadequacy of eligible income, then such
losses are carried forward to the next assessment year.
2.11-1. Overview
Computation of Gross Total Income (GTI)
Aggregate the following incomes (Including income to be clubbed in the hands
of the assessee):
a) Income from salaries xxx
b) Income from house property xxx
c) Profits and gains of business or profession xxx
d) Capital gains xxx
e) Income from other sources xxx
Total of head-wise income xxx
Less: Set-off the current year and brought forward losses (xxx)
Gross total income xxx
2.12 KNOW THE TOTAL INCOME
An assessee is allowed to claim various deductions from the ‘Gross Total Income’ on account
of investments and savings made by him. The balance income remaining after claiming the
deductions is called ‘Total Income’, which shall be the base for calculation of tax liability.
2.12-1. Overview
Computation of Total Income
Gross total income xxx
Less: Deduction under Chapter VI-A, i.e., Section 80C to 80U (xxx)
Total income xxx
2.13 KNOW THE TAX PAYABLE
2.13-1. Corporate assessee
For the calculation of tax, the total income of a taxpayer is apportioned between normal
income and special income. Normal income of a taxpayer is charged to tax as per applicable
tax rates. Whereas, special income is charged to tax at special rates (Refer Annexure E for tax
rates). The assessee has an option to compute tax at the concessional tax rates prescribed
under Section 115BA, 115BAA, or 115BAB subject to fulfilment of certain conditions.
However, if the tax payable by a company is less than 15% of ‘book profit’, then it is liable to
pay Minimum Alternate Tax (MAT) at the rate of 15% of the book profit. The MAT rate shall
be 9% if the assessee is located in an International Financial Services Centre (IFSC) and derives
income solely in convertible foreign exchange
The tax so computed on total income is further increased by surcharge (if applicable) and
Health & Education Cess and reduced by the amount of MAT credit, foreign tax credit to arrive
at net tax liability. Thereafter, the taxes already paid by the taxpayer in the form of Advance
Tax, TDS, TCS, or Self-assessment tax shall be deducted from the aggregate tax liability to
compute the amount of tax payable by or refundable to the taxpayer.
Particulars Amount
MAT liability
Tax payable on book profit computed as per MAT provisions xxx
Add:
Surcharge xxx
MAT after surcharge xxx
Add:
Health and Education Cess xxx
Total tax liability as per MAT provisions (A) xxx
Normal tax liability
Tax on income at normal rates xxx
Tax on income at special rates xxx
Tax on total income xxx
Add:
Surcharge xxx
Tax after surcharge xxx
Add:
Health and Education Cess xxx
Total tax liability as per normal provisions of the Income-tax Act (B) xxx
Gross tax liability [Higher of MAT liability (A) or Normal tax liability (B)] xxx
Less:
- MAT Credit [If Normal tax liability (B) is higher than MAT liability (A)] (xxx)
- Foreign tax credit under Section 90, 90A or 91 13 (xxx)
Aggregate tax liability xxx
Less: Prepaid taxes
- TDS deducted (xxx)
- TCS collected (xxx)
- Advance tax paid (xxx)
- Self-assessment tax paid (xxx)
Particulars Amount
Net tax liability xxx
Add:
- Interest under Sections 234A, 234B, 234C xxx
- Fees for late filing of return under section 234F xxx
Total tax payable/refundable xxx
The provisions of MAT shall not be applicable to the following:
(a) The profits and gains arising to a company from the life insurance business and to a
shipping company, the income of which is subject to tonnage taxation
(b) To the following foreign companies:
Foreign companies which are taxable under presumptive taxation schemes of
Section 44B, section 44BB, section 44BBA or section 44BBB.
Foreign companies which do not have a Permanent Establishment (PE) in India
under the provisions of the relevant DTAA.
Foreign companies, which are residents of those countries with which India does
not have a DTAA and which are not required to get registered in India under any law
relating to companies.
(c) To the companies opting for payment of taxes at the concessional rates prescribed
under section 115BAA or Section 115BAB.
2.13-2. Non-corporate assessee
13Where the amount available as a foreign tax credit against the tax payable as per the provisions of MAT exceeds the
amount of MAT Credit, which is available against the normal provision, then such excess shall be ignored while computing
the amount of credit available in respect of tax paid under the provisions of MAT.
Tax in respect of income of the non-corporate assessees shall be calculated as per the
applicable tax rates and special tax rates (Refer Annexure E for tax rates). Assessee being an
Individual, HUF, AOP, BOI, AJP, or a co-operative society has an option to compute tax at the
concessional tax rates prescribed under Section 115BAC or 115BAD or 115BAE, as the case
may be, subject to fulfilment of certain conditions.
However, if the tax payable by a non-corporate assessee on its total income (computed as per
normal provisions of the Act) is less than 18.5% (or 9% 14 or 15%15) of ‘adjusted total income’
then it shall be liable to pay Alternate Minimum Tax (AMT) at the rate of 18.5% (or 9% or 15%)
of the adjusted total income.
The tax so computed on total income is further increased by surcharge (if applicable) and
Health & Education Cess and reduced by the amount of AMT credit, relief under section 89,
or foreign tax credit to arrive at net tax liability. The net tax payable by the assessee shall be
increased by the amount of interest and late filing fees (if any). Thereafter, the taxes already
paid by the taxpayer in the form of Advance Tax, TDS, TCS, or Self-assessment tax shall be
deducted from the aggregate tax liability to compute the amount of tax payable by or
refundable to the taxpayer.
Particulars Amount
AMT liability
Tax payable on adjusted total income computed as per AMT provisions xxx
Add:
Surcharge xxx
AMT after surcharge xxx
Add:
Health and Education Cess xxx
Total tax liability as per AMT provisions (A) xxx
Normal tax liability
Tax on income at normal rates xxx
Tax on income at special rates xxx
Tax on Total Income xxx
Less:
Rebate under section 87A (xxx)
Tax after rebate xxx
14 The rate shall be 9% in case of a unit in an IFSC deriving income solely in convertible foreign exchange.
15 With effect from Assessment Year 2023-24, the rate shall be 15% in case of co-operative society.
Add:
Surcharge xxx
Tax after surcharge xxx
Add:
Health and Education Cess xxx
Total tax liability as per normal provisions of the Income-tax Act (B) xxx
Gross tax liability [Higher of AMT liability (A) or Normal tax liability (B)] xxx
Particulars Amount
Less:
- AMT Credit [If Normal tax liability (B) is higher than AMT liability (A)] (xxx)
Tax payable after AMT credit xxx
Less:
- Relief under Section 8916 (xxx)
- Foreign tax credit under Section 90, 90A or 91 17 (xxx)
Aggregate tax liability xxx
Less: Prepaid taxes
- TDS deducted (xxx)
- TCS collected (xxx)
- Advance tax paid (xxx)
- Self-assessment tax (xxx)
Net tax liability xxx
Add:
- Interest under Sections 234A, 234B, 234C xxx
- Fees for late filing of return under section 234F xxx
Total tax payable/refundable xxx
The provisions of AMT shall not be applicable:
(a) To an individual, HUF, AOP, or BOI (whether incorporated or not) or an artificial juridical
person if the adjusted total income of such person does not exceed Rs. 20 lakhs;
16Allowed by the Finance Act (No. 2), 2019, with retrospective effect from Assessment year 2007-08.
17Where the amount available as a foreign tax credit against the tax payable as per the provisions of AMT exceeds the
amount of AMT Credit, which is available against the normal provision, then such excess shall be ignored while computing
the amount of credit available in respect of tax paid under the provisions of AMT.
(b) To the Individual, HUF, AOP (other than co-operative society), BOI or AJP opting for
payment of taxes at the concessional rates prescribed under section 115BAC of the Act;
and
(c) To the resident co-operative society opting for payment of taxes at the concessional
rates prescribed under section 115BAD or section 115BAE of the Act.
(d) To a specified fund as defined under Section 10(4D).
2.14 CLUBBING OF INCOME
A taxpayer is generally taxed in respect of his own income. However, the Income-tax Act
deviates from this general provision in some cases and clubs income of other persons in
taxpayer’s income. The clubbing provisions have been enacted to counteract a generally
prevalent and growing tendency on the part of the taxpayers to dispose of their property or
income in favour of other persons in such a manner that their tax liability may either be
avoided or reduced.
The income will first be computed in the hands of the recipient under the relevant head after
allowing all exemptions and deductions permissible under that head of income. Then the
resultant income shall be clubbed in the hands of the transferor or beneficiary as per the
provisions of sections 60 to 64. If the net result of the computation of income in the hands of
the recipient is a loss, it shall be also be clubbed 18. The income computed under the relevant
head in the hands of the recipient will be included in the total income of the transferor or
beneficiary under the same head of Income. Thus, the clubbed income shall be retained under
the same head in which it is earned.
The provisions relating to clubbing of income are contained in Sections 60 to 65 of the Income-
tax Act. These provisions are as follows:
a) Income from assets transferred to another person [Sections 60 to 63]
b) Income of another person to be included in the taxpayer’s income [Section 64]
2.14-1. Income from assets transferred to another person
2.14-1a. Transfer of Income without transferring the Asset [Section 60]
If any person transfers the income from any asset without transferring the asset, such income
is included in the total income of the transferor. In this situation, it is not material whether
the agreement to transfer the income is revocable or irrevocable, and whether it was made
before or after the commencement of this Act. Thus, even if an agreement to transfer the
18 Circular No. 104, dated 19-02-1973
income was entered into before April 1, 1962, the clubbing provisions shall apply in respect
of income earned in the current financial year.
For example, a security holder confers on his nephew the right to receive interest on
securities, held by him. Such interest is included in the total income of the transferor.
Section 60 has no application where assets, producing income, are transferred along with the
income.
For example, E holds 100, 10% redeemable debentures in Z Ltd. E assigns the right to receive
interest from 50 debentures in favour of his nephew ‘N’ and gifts 50 Debentures to his son
‘P’. Since E has transferred only the right to receive the income in favour of ‘N’ the income-
producing asset remains his property. Therefore, interest income in respect of 50 Debentures
shall be clubbed with the income of E as per provisions of Section 60. However, the interest
earned from the remaining 50 Debentures shall not be clubbed with the income of E as he
has transferred both—the asset as well as the income from the asset. Section 60 has no
application in this case. If son is a minor child, such income shall be clubbed with the income
of E as per provisions of Section 64.
2.14-1b. Revocable Transfer of Assets [Section 61]
All income arising to any person by virtue of a revocable transfer of assets is included in the
total income of the transferor. If the transfer is revocable, the entire income of the transferred
asset is included in the total income of the transferor, even if only part of the income of the
transferred asset had been applied for the benefit of the transferor.
Any transfer of asset shall be deemed as ‘Revocable’, if:
a) It contains a provision for retransfer, directly or indirectly, of whole or any part of income
or assets to the transferor; or
b) It gives the transferor a right to re-assume power, directly or indirectly, over whole or any
part of income or assets.
Section 62 of the Income-tax Act contains an exception to the general rule prescribed in
Section 61. If the transfer is not revocable during the lifetime of the beneficiary and the
transferor derives no direct or indirect benefit from such income, the income shall be taxable
in the hands of the beneficiary or transferee.
For example, Mr J settled certain properties on trust for the benefit of Mr C for his lifetime.
He appoints Mr B as the trustee. In this case, if Mr J derives no benefit, either direct or indirect,
from such transfer, either trustee (Mr B) or beneficiary (Mr C) shall be assessable on such
income. However, if Mr J derives any benefit from such transfer, whole income from the
settled properties is to be included in the total income of Mr J.
2.14-2. Income of another person to be included in taxpayer’s income [Section 64]
Income-tax Act contains provisions for clubbing of income of another person with the income
of the taxpayer. These situations arise when a minor child earns some income or when a
taxpayer transfers his asset to his spouse, son’s wife, etc.
The clubbing provisions have been introduced to stop taxpayers from diverting a part of their
income to relatives in order to reduce the tax burden. To prevent such tax avoidance, clubbing
provisions have been incorporated, subject to certain exceptions, in respect of the income of
the following persons:
(a) Income of Spouse;
(b) Income of Son’s Wife;
(c) Minor’s Income;
(d) Income of any person or Association of persons;
(e) Income from property gifted to HUF.
2.15 SET-OFF AND CARRY FORWARD OF LOSS UNDER THE HEADS - CAPITAL GAINS,
INCOME FROM OTHER SOURCES AND BUSINESS INCOME
2.15-1. Loss under the head Capital Gains
Capital losses can be of two types – Short-term Capital Loss and Long-term Capital Loss.
Though both the losses are computed under the same head of income, yet distinct provisions
have been prescribed for set-off of these losses. Both the losses are computed and disclosed
separately in the Income-tax Returns.
2.15-1a. Intra-head Adjustment
As a general rule, if there are several sources of income, falling under any head of income, the
loss from one source of income may be set-off against the income from another source, falling
under the same head of income.
However, long-term capital loss can be set-off only against long-term capital gains. It cannot
be set-off against short-term capital gains, though both of them fall under the same head
‘Capital Gains’. Whereas, short-term capital loss can be set-off against any capital gain,
whether short-term or long-term.
2.15-1b. Inter-head Adjustment
As a general rule, if after intra-head adjustment the net result under a head of income is a
loss, the same can be set-off against the income from other heads in the same previous year.
However, a capital loss, whether short-term or long-term, cannot be set-off against income
taxable under any other head.
2.15-1c. Carry forward of losses
If capital loss could not be set-off against the eligible capital gains because of the inadequacy
of income during the current year, it can be carried forward and set-off in the subsequent
year. The short-term and long-term capital loss, which could not be set-off during the year,
shall be carried forward separately. In subsequent years, the short-term capital loss can be
set-off against the short-term or long-term capital gain but the brought forward long-term
capital loss shall be set-off only against long-term capital gains.
The losses can be carried forward for 8 Assessment Years immediately following the year for
which the loss was first computed.
The losses can be carried forward only if the return of income is filed on or before the due
date. However, in case the tax return is filed after the due date, the assessee can apply to the
CBDT for condonation of delay in filing of return of income.
2.15-1d. Summary
Type of Loss How to Set-off the loss? Adjustment Against Time Limit
Long-term Capital Intra-head Adjustment Long-term Capital Gains Same Year
Loss of loss
Long-term Capital Inter-head Adjustment Not Allowed -
Loss of loss
Long-term Capital Carried Forward Losses Long-term Capital Gains
Within 8
Loss Years
Short-term Capital Intra-head Adjustment Any capital gains, Same Year
Loss of loss whether short term or
long term
Short-term Capital Inter-head Adjustment Not Allowed -
Loss of loss
Short-term Capital Carried Forward Losses Any capital gain, whether Within 8
Loss short term or long term Years
2.15-2. Loss under the head PGBP
Income-tax Act provides distinct provisions for set-off and carry forward of speculative loss
and non-speculative loss. Loss from speculative transactions can be set-off only against profit
from speculative transactions. Whereas, the normal business loss can be set-off against any
income other than salary and from gambling activities.
If the loss couldn’t be set-off in the current year due to inadequacy of profit under other heads
of income, the same shall be carried forward for set-off in the subsequent year. Speculative
loss and non-speculative loss can be carried forward for 4 years and 8 years respectively. In
subsequent years, the speculative loss can be set-off only against speculative profit. Whereas,
the normal business loss can be set-off against non-speculative as well as speculative income.
(To know more about set-off and carry forward of business loss, refer Chapter 8).
Type of Loss How to Set-off the Adjustment Against Time Limit
loss?
Non-speculative Intra-head Adjustment Any Business Income, Same Year
Business Loss of loss i.e., speculative or non-
speculative business
income
Non-speculative Inter-head Adjustment Any Income except Same Year
Business Loss of loss salary income and
winning from lottery or
gambling
Non-speculative Carried Forward Any Business Income, Within 8 Years
Business Loss Losses i.e., speculative or non-
speculative business
income
Speculative Intra-head Adjustment Speculative Business Same Year
Business Loss of loss Income
Speculative Inter-head Adjustment Speculative Business Same Year
Business Loss of loss Income
Speculative Carried Forward Speculative Business Within 4 Years
Business Loss Losses Income
2.15-3. Loss under the head other sources
The loss under the head ‘other sources’ can be set-off against any income under any head.
However, if loss under the head other sources cannot be set-off in the current year due to
inadequacy of income under other heads then the same shall not be allowed to be carried
forward to subsequent years.
2.15-4. Restriction on set-off of losses
An assessee is not allowed to claim set-off of any loss against the following incomes:
(a) Undisclosed income found during search/survey [Section 79A];
(b) Income from gambling activities or online gaming of gambling nature [Section
115BB and Section 115BBJ];