Loss Adjustment

Loss adjustment refers to the process of reducing taxable income by offsetting various types of losses incurred during a Financial Year (April to March) against eligible income sources. Income for a particular FY is assessed and taxed in the subsequent Assessment Year. Losses may arise from activities such as business operations, speculative transactions, or the disposal of capital assets.

Short-term capital losses can be matched with either short-term or long-term capital gains, whereas long-term capital losses are permitted to be offset only against long-term gains. Business losses can generally be adjusted against most income categories other than salary. When losses cannot be fully absorbed in the same year, the Income Tax Act allows them to be carried forward and claimed in future years.

Illustration:

Suppose an individual reports a business loss of ₹2,00,000 in FY 2022–23 while earning ₹3,00,000 from salary and interest combined. In AY 2023–24, the business loss may be applied against the non-salary income, resulting in a taxable income of ₹1,00,000. Any portion that remains unadjusted can be carried forward according to the applicable tax rules.