Under the Income Tax Act, individuals and Hindu Undivided Families (HUFs) have the option to be taxed as per the provisions of Section 115BAC. This section allows them to avail certain special provisions for set off of losses, which can significantly impact their tax liability. In this blog post, we will explore the special provisions of set off of losses under Section 115BAC and the benefits they offer to individuals and HUFs.
Benefits of Section 115BAC for Individuals and HUFs
The special provisions of set off of losses under Section 115BAC offer several benefits to individuals and HUFs:
Flexibility in Set Off:
Individuals and HUFs can set off losses from one source of income against any other source of income, providing them with greater flexibility in tax planning.
Reduction in Tax Liability:
The ability to set off losses without any restrictions or limitations can significantly reduce the tax liability of individuals and HUFs.
Carry Forward of Losses:
The provision to carry forward losses for up to 8 years ensures that taxpayers do not lose out on the benefit of losses incurred in a particular year.
Special Provisions of Set Off of Losses under Section 115BAC
Section 115BAC of the Income Tax Act provides certain special provisions for set off of losses for individuals and HUFs who have opted to be taxed as per its provisions. These special provisions aim to provide relief to taxpayers by allowing them to set off losses without any restrictions or limitations.
Under Section 115BAC, individuals and HUFs can set off losses from one source of income against any other source of income, irrespective of the nature or category of income. This means that losses from business or profession can be set off against income from salary, house property, capital gains, or any other source of income.
Additionally, Section 115BAC also allows individuals and HUFs to carry forward losses for a period of up to 8 years. This means that if a taxpayer is unable to set off losses in a particular year, they can carry forward those losses and set them off against income in the subsequent years, up to a maximum of 8 years.
For the purpose of computing the total income, where an assessee being an Individual or HUF who has opted to be taxed as per the provisions of section 115BAC, the following special provision of Set Off of Loss and Unabsorbed Depreciation shall apply—
(a) (i) no deduction on account of interest on loan taken for self-occupied residential house property shall be allowed while computing the income under the head ‘income from house property’.
(ii) the total income shall be computed without set off of any loss under the head ‘income from house property’ with any other head of income in the same assessment year.
(b) the total income shall be computed without set off of any loss carry forward or depreciation for any earlier assessment year, if such loss or depreciation is attributable to any of the following deductions:
(i) Deduction available to SEZ unit under section 10AA.
(ii) Additional depreciation under section 32(1)(iia) to an assessee engaged in the business of manufacture of any article or a thing or generation, transmission or distribution of power.
(iii) Investment allowance of 15% if new plant and machinery is installed in notified backward areas in certain States as per section 32AD.
(iv) Deduction under section 33AB to an assessee engaged in the business of growing & manufacturing of Tea/Coffee/Rubber.
(v) Deduction under section 33ABA on account of deposit in Site Restoration Fund.
(vi) Deduction in respect of payment made to certain association/institutions for scientific research [Section 35(1)(ii)] or payment made to a company to be used for scientific research [Section 35(1)(iia)] or payment made to certain institutions for research in social sciences or statistical research [Section 35(1)(iii)] or payment made to a National Laboratory or a University or an Indian Institute of Technology [Section 35(2AA)].
(vii) Deduction under section 35AD in respect of expenditure on specified business.
(viii) Deduction under section 35CCC in respect of expenditure on agriculture extension project.
Loss and Depreciation referred to in Clause (b) above shall be deemed to have been given full effect to [Section 115BAC(3)]
The loss and depreciation referred to in clause (b) above shall be deemed to have been given full effect to and no further deduction for such loss or depreciation shall be allowed for any subsequent year.
However, where there is a depreciation allowance in respect of a block of assets which has not been given full effect to prior to the assessment year beginning on 1.4.2022, corresponding adjustment shall be made to the written down value of such block of assets as on 1.4.2021 in the prescribed manner (see Notification No. 82/2020, dated 1.10.2020), if the option under section 115BAC(5) is exercised for a previous year relevant to the assessment year beginning on 1.4.2022.
Let us assume that the brought forward business loss and unabsorbed depreciation of earlier assessment years to be set off in this previous year, in case of R an individual, is Rs.3,00,000 and Rs.2,40,000 respectively. The brought forward loss includes the loss attributable to the following deductions claimed in the earlier years.
|Investment allowance of 15% if new plant and machinery is installed in notified backward areas in certain States as per section 32AD.||75,000|
|Deduction in respect of payment made to certain association/institutions for scientific research [Section 35(1 )(ii)]||40,000|
|Deduction under section 35CCC in respect of expenditure on agriculture extension project.||35,000|
Further, brought forward unabsorbed depreciation includes Rs.1,30,000 on account of additional depreciation claimed in the past. Written down value of the asset as on 1.4.2021 is Rs.6,20,000.
In this example, the business loss which is allowed to be set off shall be Rs. 50,000 (i.e., Rs.3,00,000 — Rs.75,000 — Rs.40,000 — Rs.35,000) which are attributable to deductions on account of— (i) investment allowance (ii) donation to certain association/institutions for scientific research and expenditure on agriculture extension project.
Further, unabsorbed depreciation of Rs.2,40,000 — Rs.1,30,000 (on account of unabsorbed additional depreciation) = Rs.1,10,000 shall be allowed to be carried forward for set off and Rs.1,30,000 on account of unabsorbed additional depreciation shall be added to the written down value of the asset as on 1.4.2021.
Hence, the written down value of the asset for the purpose of claiming depreciation shall be Rs.6,20,000 + Rs.1,30,000 = Rs.7,50,000.