What is negative income tax?

In a year where you have experienced losses and not generated any income, negative income tax comes into the picture. This only applies to self-employed individuals because, if a salaried person has no income in a given year, they fall into the 0 tax rate and are therefore not required to pay any taxes.

Is it necessary to file return for loss (negative Income)?

It is not mandatory to file return for loss. However, you must file ITR (Income Tax Returns) for negative income or losses to carry forward losses.

What are the benefits of filing losses?

While filing ITR, you have an option of filling in the details of the losses incurred by you. If you file the income tax returns for your loss, you can carry them forward to the future years, in which these losses can be set against future profits when they arise.

However, if you do not file your returns by the due date, you will not be able to carry forward your losses to the next financial year. This, in turn, will aggravate or compound your losses as when you carry forward your losses you reduce your future tax liabilities.

For instance, suppose your income is Rs. 6,00,000 and the loss from your house that you have let out is Rs. 8,00,000. If you do not file your ITR, then you will not be able to carry forward this loss to the oncoming years. Moreover, even if you file your returns a month late, you will still not face any penalty as the loss will abate against your income, but you will not be able to carry it forward the loss of Rs. 2,00,000 as you filed the ITR late.

If you have any income in the year of loss, your losses can be set off against that income. This will reduce your taxable income by a hefty margin. If you do not have any income or your losses are higher than income, you can carry the loses forward and adjust them in your future tax returns. However, one thing that you must remember that while short-term capital losses can be set off against either short-term gains or long-term gains, long-term capital losses can be only set off against long-term capital gains.

Taxation on Loses filed in the ITR

  • If you have negative income in a financial year, you may not be required to pay taxes.
  • If you can set-up your losses with another income source you have, you can reduce the loss amount from your taxable income.

Section 139(3) of the Income Tax Act

An income tax return must be filed if you are experiencing a loss and estimate that the loss will be recovered in upcoming years. It is therefore necessary for you to submit an ITR if you want to be able to balance your loss from this year with profits from upcoming years in order to pay less tax the next year. Otherwise, you won't be able to do this.

According to Section 139(3), the following situations require the filing of an income tax return:

  • If you want to carry a loss over to the following year and use it to offset future income, you must submit a return if the loss falls under "Capital Gains" or "Profits and Gains of Business and Profession."
  • If the loss falls under the category of "House Property", the loss can be carried forward even if the return is submitted after the deadline. Therefore, under Section 24 of the Income Tax Act, anyone who has a house loan and submits their return after the deadline can still benefit from the deduction for interest payments on the loan.
  • If an ITR reflecting the loss has not been filed by the deadline, the loss of income for the current year cannot be carried forward. But if returns for previous losses were timely filed and the taxman assessed them, the loss from earlier years may be carried forward.
  • Even if the return is filed after the due date, the setting off will be permitted if the loss would be offset against an income during the same year.
  • Any losses that are carried over into the following year can only be offset by matching heads. For instance, a loss in capital gains can only be compensated by another capital gain in the years that follow.

Loss under one head of income can be adjusted or set off against income under another head. However, the following points should be considered:

  1. Where the net result of the computation under any head of income (other than “Capital Gains”) is a loss, the assessee can set-off such loss against his income assessable for that assessment year under any other head, including “Capital Gains”.
  2. Where the net result of the computation under the head “Profits and gains of business or profession” is a loss, such loss cannot be set off against income under the head “Salaries”.
  3. Where the net result of computation under the head ‘Capital Gains’ is a loss, such capital loss cannot be set-off against income under any other head.
  4. Where the net result of the computation under the head “Income from house property” is a loss and the assessee has income assessable under any other head of income, the amount of such loss exceeding 2 lakhs would not be allowable  to be set-off against income under the other head. In other words, the maximum loss from house property which can be set-off against income from any other head is Rs. 2 lakhs.
  5. Speculation loss, loss from the activity of owning and maintaining race horses and losses from specified business referred to in section 35AD cannot be set off against income under any other head.

5 Rules to Follow for Setting Off Losses Against Gains

When balancing capital losses against capital gains, a taxpayer must adhere to five fundamental guidelines. These are the five rules:

  • Only exempt income may be used to offset losses from exempt sources.
  • Among the many heads of income, there are intra-head and inter-head adjustments. Prior to performing the inter-head adjustment, the intra-head adjustment must be completed. When a taxpayer makes an intra-head adjustment, she is able to offset a loss from one source under one head against income from another source under the same head. If you own three residential properties and one of them incurs a loss, for instance, the revenue from the other two residential properties might be used to offset the loss (such as rental income). Losses from one head of income (such as company income) are offset against gains from another head of income in a process known as inter head adjustment (e.g., capital gains).
  • Unabsorbed depreciation in the commercial and professional worlds is entirely separate from business loss or any other kind of loss.
  • It is not possible to offset a loss from a speculation-related company (such as intraday share trading) against any other type of income.
  • No loss may be offset by income from winners from lotteries, races, including horse races, card games, other games, gambling, cryptocurrency revenue, etc.

Things to keep in mind while claiming set-off

When claiming set off from carried forward losses, it's crucial to keep these three things in mind.

  • First, the base year of the loss must be re-verified to ensure that the year in which the loss is incurred is within the allotted window of 8 years or 4 years as the case may be.
  • Second, if the loss amount has been decreased in assessments in any of the years and whether such adjustment has become final.
  • And third, whether the return for the base year was submitted by the deadline for submitting ITRs for a certain class of tax-payers.

No loss of any sort can be offset against such secret income in the event that you were the subject of income tax investigations such search and survey and as a result, your undisclosed income was discovered.

Such gains and losses must be reported in the ITR, along with any set-offs that are appropriate. The Schedule - CG of the ITR form is where this information should be reported.

Maximum permissible period for which loss can be carry forward , are as follows

Section Nature of loss to be carried forward Income against which the brought forward loss can be set off in subsequent years Maximum permissible period [from the end of the relevant assessment year] for carry forward of losses


Unabsorbed loss from house property

Income from House Property

8 assessment years


Unabsorbed business loss (non- speculative)

Profit and gains from business or profession (non- speculative)

8 assessment years


Loss from speculation business

Income from speculation business

4 assessment years


Loss from specified business under section 35AD

Profit from specified business under section 35AD

Indefinite period


Long-term capital loss

Long-term capital gains

8 assessment years


Short-term capital loss

Short/Long-term capital gains

8 assessment years


Loss from the activity of owning and maintaining race horses

Income from the activity of owing and maintaining race horses.

4 assessment years


As per the provisions of section 72(2), brought forward business loss is to be set- off before setting off unabsorbed depreciation. Therefore, the order in which set- off will be effected is as follows –

  • Current year depreciation [Section 32(1)];
  • Current year capital expenditure on scientific research and current year expenditure on family planning, to the extent
  • Brought forward loss from business/profession [Section 72(1)];
  • Unabsorbed depreciation [Section 32(2)];
  • Unabsorbed capital expenditure on scientific research [Section 35(4)];
  • Unabsorbed expenditure on family planning [Section 36(1)(ix)].

How to Claim Set-Off in ITR Form

You must choose the appropriate ITR form after you are aware of the numerous income sources. For the purpose of computation, one must enter the data in the columns pertaining to capital gains and losses. The whole amount of consideration (sales price), the date of sale, the cost of purchase and the date of acquisition, as well as any other key information or expenses, are the data that you must submit.

You must also include the key information if you are claiming a deduction (such as under section 54) against capital gains. Before submitting the ITR, it is crucial to enter the correct information and then double-check and validate that it is accurate. Before entering information into the ITR forms, it is advisable to calculate the income and losses from hard work.


It is crucial to keep in mind that, if you have been consistently reporting ITR for a few years, it is preferable to do so even if your income is below the taxable limit or if you have experienced a loss. This is so that you won't receive a warning for failing to file an income tax return from the Income Tax department, which is likely to view this as an aberration.