If you're a business owner shifting from the old to the new income tax regime, it’s crucial to understand how this affects your ability to carry forward and set off business losses. In the previous income tax regime, companies are permitted to carry forward losses and offset them against future income, subject to certain conditions. These are timely filing of returns and keeping good books of account. Losses may be carried forward for eight years for assessment and are useful for early-stage as well as struggling companies.
What changes under the new tax regime
The new concessional tax regimes—Section 115BAC for individuals and Hindu Undivided Families (HUFs), and Section 115BAA or 115BAE for corporations—provide reduced tax rates in return for waiving different exemptions and deductions. Once you choose the new regime, some tax benefits under the old regime are no longer available, and this has a direct impact on how carried-forward losses are dealt with.
Impact on losses attributable to disallowed deductions
As per explanations by the Central Board of Direct Taxes (CBDT), where your carried-forward business losses are attached to deductions that are no longer allowed under the new regime—like extra depreciation, SEZ benefits under Section 10AA, or Chapter VI-A deductions—they will be forfeited. These losses cannot be carried forward or offset in the new regime since they arose out of tax concessions that no longer exist once you opt out.
This implies that if your business loss in past years was partly accounted for by claiming further depreciation on plant and machinery, or exemptions under Section 10AA for SEZ units, then such parts of the loss will not be permitted to be offset in future years under the new tax regime.
Treatment of regular business losses
Not all business losses are impacted by the change. If your brought-forward losses are entirely from normal business activities and are not related to any of the deductions or exemptions that are prohibited under the new regime, you might still be able to carry them forward and offset against future profits. But this also is subject to compliance with other usual tax conditions, such as return filing dates and documentation.
One-off switch and loss of adaptability
In contrast to salaried taxpayers, who can change between the old and new regimes every year of their financial lives, companies are not so fortunate. Once a company or professional taxpayer chooses the new regime, it is final for subsequent years. This implies any losses that are lost as a result of the transition cannot be restored later, even if you realize the new regime isn't advantageous in the long term.
Consider before changing
If your business has substantial carried-forward losses and you’re considering switching to the new tax regime, it’s essential to review how much of those losses are tied to disallowed
deductions. In many cases, it may be more beneficial to remain in the old regime until those losses are fully adjusted against profits, especially if they can help reduce your tax liability over the next few years.
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