Turn Losses into Tax Saving: Set Off & Carry off your loss

M Shafiqul Islam।। In our country, tax evasion is frequent due to high tax rates and a complex tax system. Many individuals refrain from paying taxes altogether because of these high rates or don’t know how to calculate tax properly. However, it's important to understand that there are seven different sources of income on which taxes are imposed, including income from employment, rent, agriculture, business, capital gains, financial assets, and other sources. Taxes are calculated based
on the total income earned from all these sources.

Instead of paying substantial amounts of tax for a single source of income, individuals can use a set-off mechanism to offset losses from one source against income from another, thus reducing the overall tax liability. Legal tax avoidance methods can help individuals pay less or no tax.

One effective mechanism for reducing tax liability is to set off losses in the current year or carry forward remaining losses to the next year. For example, if Mr. Asif received a total rent of Tk 6 lakhs but incurred a loss in agriculture of Tk 8 lakhs, his taxable income for that year after setting off the losses would be zero, and he would still have a loss of Tk 2 lakhs, which can be carried forward to the next year. Losses from one income year can be carried forward for up to six years.

It's important to remember that losses from capital gains, speculation businesses, and tobacco businesses can only be used to offset income from those same sources. If you have a loss from a capital gain, you can only set it off against income from capital gain in the next year. The same goes for losses from speculation and tobacco businesses, which can only be carried forward to the next year and set off against income from those same businesses.

Only losses from rent or agriculture can be set off with any other income head.

Investing in agriculture or renting out property can be profitable. If the income generated from these sources is not sufficient, the resulting loss can be used to offset income from other sources, thereby reducing the tax burden. Additionally, investing in agriculture can contribute to the economy by creating more employment opportunities.

Writer : M Shafiqul Islam, Department of Accounting & Information Systems Bangladesh University of Professionals.