Unit 3: Losses, deductions & taxation of assessees
Income Tax Law & Practice notes · PTU syllabus (BCOM 403-18)
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Unit summary
After computing income under each head, losses are adjusted and deductions claimed before tax is computed. This unit covers set-off and carry forward of losses, deductions from gross total income under Chapter VI-A, and the computation of tax for individuals, Hindu Undivided Families, firms and associations of persons.
After this unit you can
- Apply rules for set-off and carry forward of losses
- Claim deductions under Chapter VI-A
- Compute the tax liability of individuals under old and new regimes
- Explain the taxation of HUFs, firms and AOPs
PTU syllabus topics
- Set-off and carry-forward of losses
- deductions from total income
- taxation of individuals
- Hindu Undivided Family
- firms and association of persons
Meaning
Adjust a loss against income in the same year
Take the unadjusted loss to future years
Scope
Within the same head or across heads
Only certain losses, within time limits
Example
Loss in one business vs profit in another
Business loss carried up to eight years
Topic 1
Set-off and carry forward of losses (Sections 70–80)
- 1Intra-head set-off (Section 70)
Loss from one source against income from another source under the same head
- 2Inter-head set-off (Section 71)
Loss under one head against income under another head
- 3Carry forward and set-off (Sections 72–74)
To future years
| Loss | Inter-head set-off | Carry forward | Against |
|---|---|---|---|
| House property | Up to ₹2 lakh | 8 years | House property income |
| Business (non-speculative) | Yes, except against salary | 8 years | Business income |
| Speculation business | No | 4 years | Speculation income |
| Short-term capital loss | No | 8 years | STCG or LTCG |
| Long-term capital loss | No | 8 years | LTCG only |
| Owning and maintaining race horses | No | 4 years | Same activity |
| Unabsorbed depreciation | Yes, except salary | Indefinitely | Any head except salary |
| Lottery and casual income losses | No | No | — |
- Return of loss must be filed by the due date to carry forward losses (except house property loss and unabsorbed depreciation).
Topic 2
Deductions under Chapter VI-A
| Section | Deduction | Limit / note |
|---|---|---|
| 80C | LIC, PPF, ELSS, EPF, NSC, tuition fees, home-loan principal, Sukanya | ₹1,50,000 (with 80CCC and 80CCD(1)) |
| 80CCD(1B) | Additional NPS contribution | ₹50,000 |
| 80CCD(2) | Employer's NPS contribution | 14% (new regime) / 10% of salary |
| 80D | Health insurance premium, preventive check-up | ₹25,000 self; ₹50,000 if senior; plus parents |
| 80DD / 80U | Disabled dependant / self | ₹75,000; ₹1,25,000 for severe disability |
| 80E | Interest on education loan | Full interest for 8 years |
| 80G | Donations to approved funds | 100% or 50%, with or without qualifying limit |
| 80GG | Rent paid where no HRA | Least of ₹5,000 p.m., 25% of total income, rent − 10% |
| 80TTA / 80TTB | Savings bank interest / senior citizens' interest | ₹10,000 / ₹50,000 |
| 80JJAA | New employment by businesses | 30% of additional employee cost for 3 years |
- Under the new regime (Section 115BAC — default), most Chapter VI-A deductions are not available (80CCD(2), 80CCH and 80JJAA are allowed).
Topic 3
Taxation of individuals
New tax regime — slab rates for FY 2025-26 (AY 2026-27)
| Total income | Rate |
|---|---|
| Up to ₹4,00,000 | Nil |
| ₹4,00,001 – ₹8,00,000 | 5% |
| ₹8,00,001 – ₹12,00,000 | 10% |
| ₹12,00,001 – ₹16,00,000 | 15% |
| ₹16,00,001 – ₹20,00,000 | 20% |
| ₹20,00,001 – ₹24,00,000 | 25% |
| Above ₹24,00,000 | 30% |
- Rebate (Section 87A): new regime — up to ₹60,000 for residents with total income up to ₹12 lakh (so no tax up to ₹12 lakh, ₹12.75 lakh for salaried after standard deduction); old regime — up to ₹12,500 for income up to ₹5 lakh.
- Old regime slabs: up to ₹2.5 lakh nil (₹3 lakh senior, ₹5 lakh super senior); ₹2.5–5 lakh 5%; ₹5–10 lakh 20%; above ₹10 lakh 30%.
- Surcharge on high incomes (10%–25% in the new regime) and 4% health and education cess on tax + surcharge.
Example
Salaried resident, gross salary ₹15,75,000 under the new regime. Taxable income = 15,75,000 − 75,000 = ₹15,00,000. Tax = 0 + 20,000 (4–8 lakh) + 40,000 (8–12 lakh) + 45,000 (12–15 lakh at 15%) = ₹1,05,000; cess 4% = ₹4,200; total ₹1,09,200. (No 87A rebate since income exceeds ₹12 lakh; marginal relief applies only just above ₹12 lakh.)
Exam tip
Slabs and rebates change with each Budget — always write "for AY ____" above your computation.
Topic 4
Taxation of HUF, firms and AOPs
- HUF: taxed like an individual (same slabs, both regimes); income from HUF property; partition and its effects (Section 171).
- Firm (including LLP): flat 30% + surcharge (12% if income above ₹1 crore) + 4% cess; no basic exemption.
- 1
Net profit
- 2
Add disallowances including excess partner interest and remuneration
- 3
Book profit
- 4
Allow interest to partners up to 12% simple per annum (if authorised by deed)
- 5
Allow remuneration to working partners within limits
On first ₹6 lakh of book profit: higher of ₹3 lakh or 90%; balance 60%
- 6
Taxable income of firm
- Partner's share of profit is exempt (Section 10(2A)); interest and remuneration allowed to the firm are taxable in the partner's hands as business income.
- AOP/BOI: if shares of members are determinate and no member has income above the exemption limit — slab rates; if any member's income exceeds the limit — maximum marginal rate (MMR); if shares are indeterminate — MMR (Sections 167B, 86).
Key terms
- Set-off
- Adjusting a loss against income of the same year
- Unabsorbed depreciation
- Depreciation not fully absorbed, carried forward indefinitely
- Rebate under 87A
- Tax relief for resident individuals below an income limit
- Book profit
- Net profit of a firm used to compute allowable partner remuneration
- MMR
- Maximum marginal rate of tax including surcharge
Quick revision
- Intra-head → inter-head → carry forward; most losses 8 years, speculation 4 years.
- 80C ₹1.5 lakh; 80D health; 80CCD(1B) ₹50,000 — old regime only.
- New regime default; no tax up to ₹12 lakh (rebate) for FY 2025-26.
- Firm: 30% flat; Section 40(b) limits partner interest (12%) and remuneration.
- HUF like individual; AOP at slab or MMR depending on shares.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.What is inter-head set-off?
- Q2.Which losses cannot be set off against salary income?
- Q3.State the limit of deduction under Section 80C.
- Q4.What is the rebate under Section 87A?
- Q5.How is a partnership firm taxed?
- Q6.What is book profit for a firm?
Long-answer questions
- Q1.Explain the provisions for set-off and carry forward of losses.
- Q2.Explain the deductions available under Chapter VI-A.
- Q3.Compute the tax liability of an individual under the new regime with an illustration.
- Q4.Explain the taxation of firms and the limits on partners' remuneration and interest.
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