Is It Possible to Continue Claiming Business Losses from Earlier Years After Moving from Old Income Tax Regime to New One?

Two years ago, I filed a business loss claim under the old tax regime. Once more, under the previous administration, I carried them forward in my most recent Income Tax Return (ITR). I intend to transition to the new regime during the current evaluation year. Can I carry over the losses I recorded last year under the old tax regime?

Starting from Assessment Year 2024–25, the new tax regime has become the default option for individual taxpayers, unless they specifically choose to stick with the old regime. For taxpayers with business income, it’s important to be cautious, especially if they have business losses or unabsorbed depreciation from previous years, when deciding which tax regime to opt for this year.

According to Section 115BAC(2) of the Income Tax Act, if you switch to the new tax regime, you can’t carry forward business losses or depreciation if they come from deductions that are not allowed in this regime. These disallowed deductions include: Extra depreciation on machinery under Section 32(1)(iia), Investment-related deductions under Sections like 35AD, 35(1)(ii)/(iia)/(iii), 33AB, 33ABA and Most Chapter VI-A deductions, except for 80CCD(2), 80CCH(2), and 80JJAA. However, you can still carry forward losses that come from regular business costs, like rent, salaries, or electricity, or from basic depreciation (under Section 32(1)(ii)).

Examples where losses can be carried forward under the new regime:

• A trader has a loss due to normal expenses like rent, staff salary, and electricity. Since these are regular business costs, the loss can be carried forward.
• A freelancer has leftover depreciation on a laptop (using the standard rate). This is allowed under the new regime, so the loss can be carried forward.

Examples where losses cannot be carried forward under the new regime:

• A manufacturer claims a loss due to extra depreciation on machinery. This kind of depreciation isn’t allowed in the new regime, so the loss can’t be carried forward.
• A startup claims a deduction for capital investment under Section 35AD. Since this deduction isn’t allowed in the new regime, the loss also can’t be carried forward.

Assessee must keep a note of losses item-wise. If a large part of your past losses comes from deductions that are not permitted in the new tax regime, you might lose the benefit of setting them off if you switch. In such cases, you can still choose to stay in the old regime by submitting Form 10-IEA before the tax return due date.

But if your losses are from regular business activities or normal depreciation, the new regime does allow you to carry them forward and set them off.

The new tax regime offers lower tax rates but with fewer deductions. Therefore, a comparative tax computation factoring in eligible losses is important.