When managing your income tax, you might wonder if you can adjust your losses from one source of income with gains from another. The Income Tax Act of India, under Section 71, provides this exact relief.
Section 71 of the Income Tax Act deals with the set off of losses from one head against income from another. It helps taxpayers reduce their total taxable income and save taxes efficiently. Let’s understand how it works in practical terms and what you should keep in mind while using this provision.
What is Section 71 of the Income Tax Act?
Section 71 of the Income Tax Act allows taxpayers to set off certain losses under one head of income (like house property or business) against income from other heads (like salary or capital gains). This set-off mechanism helps individuals, HUFs, or businesses legitimately reduce their tax liability.
For example, if you have a loss of ₹1.5 lakh under “Income from House Property” and a salary of ₹10 lakh, you can reduce your taxable salary by ₹1.5 lakh & pay tax only on ₹8.5 lakh.
This is a classic case of set off of loss from one head against income from another, as permitted by Section 71.
Which Losses Can Be Set Off Under Section 71?
Not all types of losses can be adjusted against all types of incomes. Here’s how it works:
✅ 1. Loss from House Property
- Can be set off against any other head of income (like salary, business income, or capital gains).
- The maximum limit of set-off from house property loss is ₹2 lakh per year.
✅ 2. Business Loss (Non-speculative)
- Can be set off against income from any head except salary.
- For example, business loss can be set off against capital gains or rental income, but not salary income.
❌ 3. Capital Loss
- Cannot be set off under Section 71.
- Long-term capital loss can be adjusted only against long-term capital gain.
- Short-term capital loss can be adjusted against both short-term & long-term capital gains.
❌ 4. Speculative Loss, Lottery Winnings, Race Income
- Speculative or gambling-related losses cannot be set off against any other income.
- These must be carried forward and set off only against similar income types."
Important Conditions to Remember
- The taxpayer must file their income tax return before the due date to claim a set off & carry forward of losses.
- Only losses of the current financial year can be set off under Section 71.
- If losses are not fully set off, they can be carried forward to future years (under Section 72, 74, etc., depending on the type).
Also Read: Section 6: The Silent Rule That Decides Whether You Pay Tax in India—or Not
Practical Examples of Section 71 Set Off
🔹 Example 1: House Property Loss
- Salary Income: ₹8,00,000
- Home Loan Interest: ₹2,50,000 (Loss under Income from House Property)
- Allowed set-off = ₹2,00,000
- Net taxable income = ₹6,00,000
🔹 Example 2: Business Loss
- Business Loss: ₹3,00,000
- Capital Gains: ₹5,00,000
- Set-off allowed = ₹3,00,000
- Taxable capital gain = ₹2,00,000
When Set Off is Not Allowed
Certain losses, like losses from speculative business, horse races, or illegal income, cannot be set off under Section 71. Moreover, capital losses have their own set of rules & cannot be adjusted with income from other heads."
Why Section 71 Matters to You
This section is crucial for small business owners, freelancers, salaried individuals with home loans, & anyone with multiple sources of income. Using it wisely allows you to:
- Reduce your taxable income
- Optimize your tax planning
- Avoid losing out on valuable deductions
So, if you’re someone juggling salary, rent, stock market returns, or business income, knowing how to apply Section 71 of the Income Tax Act can help you save money legally.
Final Thoughts
Tax laws can be confusing, but sections like 71 offer relief when income fluctuates across sources. Whether you have a rental loss, a side business with losses, or capital gains, Section 71 can help you reduce your tax burden legally and smartly.
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