Carried forward and Set of losses

Your cousin opens a small café in Andheri and loses money for the first two years. In the third year he also earns rent from a flat and some interest on a fixed deposit. Must he pay tax on the rent and interest as if the café never lost anything? Or can the café’s losses be used to reduce what he owes? Income-tax law has a detailed answer, and it is built on two ideas: use the loss now against other income (set-off), or save it for later years (carry forward).

In two minutes

A loss under one head or source is first set off against income of the same head, then against income under other heads, and whatever cannot be absorbed is carried forward to later years, where it can be set off only against income of a kind the Act allows and usually only for a limited number of years.

The rest of this chapter

The full explanation, the cheat sheet, every previous-year question at every mark weight, the quiz and the answer skeletons are part of Law of Taxation on LexBlox Semester. Sign in to unlock the subject, or read Module 1 of Legal Language and Writing free.