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What is Negative Income Tax?

Taxpayers file income tax* every year for the salaries and incomes they earn. The ITR rules are different for self-employed taxpayers who can not only file their income but also can file their losses incurred in a fiscal year. Many people call it negative income tax filing.

An average Indian taxpayer is unaware of many rudimentary details of the Indian taxation system. And evidently, uncommon topics like negative income tax* are almost alien to them. But if you want to extend your perimeter of tax knowledge, this is the right blog for you. 
 

Here, we will demystify a few negative income tax concepts like negative taxable income and negative provision for income taxes, helping you understand how you can file an income tax return for your losses.
 

Keep reading to learn more about negative tax.

Negative Income Tax Definition

The term negative income tax can be very confusing for many people. It is essentially a tax rebate for negative income and does not apply to salaried taxpayers.
 

The negative provision for income taxes comes into play when a taxpayer makes a loss in a fiscal year. This provision covers only self-employed taxpayers. 
 

If a salaried taxpayer does not earn any income in a financial year, his tax liability becomes zero, and he becomes eligible for a nil tax return. 

 

Does Negative Income Tax Impact Me?

As we have discussed, negative income tax only applies to self-employed individuals. If you are one such, you can file a negative income on your tax return if you incur a loss in a financial year.

How Does Negative Income Tax Work?

A person can earn from many sources and not just from salaries. For example, many people earn a living from their stock, equity, real estate investments, etc. Some day traders trade in the stock market in equity or commodities, and in these scenarios, there is a significant chance of making losses. 
 

Stock market traders will know that market volatility can wash up your entire profit in just a few days or moments in the worst scenarios. In such a case, the trader has to book losses and file a loss in their income tax return. 
 

The income tax department has a provision under Section 139(3) that allows the trader to carry forward their loss to the next year and set it off by profits. In a simpler way, if you have incurred a loss of ₹2 lakhs in FY 2023-24, you can carry it forward to the next year. 
 

Now, in the next fiscal year (2024-25), if you make a profit of ₹2 lakhs, you will not be liable to pay tax on it because it will set off your last year’s losses.
 

Provision Under Section 139(3) of the Income Tax Act

To understand the intricacies of filing income tax returns for losses, or, if we say, negative income tax returns, you need to understand the provisions under Section 139(3) of the IT Act. 
 

  • You must submit a return within time if your loss falls under "Capital Gains" or "Profits and Gains of Business and Profession." Otherwise, you cannot carry your losses over to the following year. 

  • You have incurred a loss under the "House Property" category, which can still be carried forward even if you submit your return after the deadline. Further, Section 24 of the IT Act will also protect you even if you have missed the deadline, and you can still claim a tax deduction on interest paid on a house loan.

  • If you fail to submit your ITR before the deadline, your losses incurred in the current assessment year cannot be carried forward. However, if you had filed last assessment year’s ITR on time, and if all the previous year's losses have not been covered so far, they can still be carried forward to the next assessment year. 

  • Losses that are carried over into the following assessment year can only be offset by profits or incomes earned in the same heads. For example, an income in capital gains in the next year can offset the loss in capital gains in the current year. 

  • If your net result under any head other than ‘capital gains’ is a loss for an assessment year, these losses can be set off by incomes shown under any heads in that assessment year. 

  • Losses in ‘capital gains’ can only be set off by income in ‘capital gains.’

  • Losses shown under the “Profits and gains of business or profession” head cannot be set off by profits or incomes earned under the “Salaries” head.

  • Losses in ‘short-term capital gain’ can also be set off by profits in ‘long-term capital gains,’ but it cannot be vice versa. 

  • If you are showing a loss under the head “Income from house property,” it can be set off by income in any other head, but to the maximum limit of ₹2 lakhs.

  • If you incurred a speculation loss or loss by keeping and maintaining racehorses, you cannot set off the losses from income under any other head.

  • Losses incurred in Section 35AD cannot be set off by income from any other head.

Although there is no negative income tax formula, these pointers under section 139(3) act as a guideline to determine how your reported losses can be factored into calculating your income tax.

Benefits of Negative Income Tax 

The main benefit of negative income tax filing is that taxpayers can file returns for their losses incurred in an assessment year. By doing so, they can carry forward the losses to set them off with future incomes and profits. This can significantly reduce tax liabilities in future assessment years. 
 

An assessee can carry forward their losses to 8 consecutive assessment years. It means that the assessee will have a lower tax liability for all those years until his losses are squared off with profits.

Challenges in Negative Income Tax

Filing a negative income tax return or tax return for losses can be tricky because losses filed under particular heads can only be offset by incomes under matching heads. Not to mention, if a taxpayer misses the deadline for tax filing, he cannot carry forward the losses to the following years.

End Note

The term negative income tax return can confuse many people, but in its true essence, it means filing returns for losses booked in a fiscal year and reaping its benefits in the following years. Just to reiterate, a negative provision for income taxes is not applicable to salaried taxpayers.

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

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Frequently Asked Questions

What is the maximum permissible period to carry forward my losses in long-term capital gains?

You can carry forward your losses under the ‘long-term capital gains’ header for a maximum number of 8 years.

What is the maximum permissible period to carry forward my losses in short-term capital gains?

You can carry forward your losses under the ‘short-term capital gains’ header for a maximum number of 8 years.

What is the maximum permissible period to carry forward my losses from specified business under section 35AD?

Under section 73A, you can indefinitely carry forward your losses in businesses mentioned under section 35AD. It mainly deals with capital expenditure on any business, barring expenses on purchasing financial instruments, land, or other assets.

Can I claim a deduction under section 80C on negative taxable income?

In the Indian taxation system, negative taxable income means Return of Loss. One can file a return for their losses, and this provision is covered under Section 139(3). However, normal deductions under section 80C apply to all taxpayers. Section 80C does not bar from setting off losses in the current fiscal year but does not allow carrying it forward.

Disclaimer

  • Insurance cover is available under the product.

  • The products are underwritten by Tata AIA Life Insurance Company Ltd.

  • The plans are not a guaranteed issuance plan, and it will be subject to Company’s underwriting and acceptance.

  • For more details on risk factors, terms and conditions please read sales brochure carefully before concluding a sale.

  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.

  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.

  •  Tax: *Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.