With India’s new tax regime promising lower rates in exchange for fewer exemptions and deductions, many business owners are weighing the pros and cons of making the switch. While the headlines often focus on tax slabs and exemptions for salaried individuals, there’s a less obvious but critical consideration for business owners: the fate of carried-forward business losses.
For entrepreneurs, professionals, and corporate taxpayers, shifting to the new regime isn’t just about saving on taxes today—it could also mean forfeiting tax-saving opportunities from past years. One of the most significant implications is how the transition affects the ability to carry forward and offset earlier business losses. If your business has accumulated losses over time, especially from depreciation or tax-exempt operations, this article will help you understand what changes once you opt for the new tax regime.
Carried-Forward Losses in the Old Regime: A Quick Recap
Under the old income tax regime, business owners could carry forward losses and set them off against future profits. These provisions were a valuable cushion for startups and struggling enterprises, allowing them to reduce their tax burden during profitable years. Generally, business losses could be carried forward for up to eight assessment years, provided the taxpayer complied with timely filing requirements and maintained proper documentation.
Losses could arise from various sources—operational inefficiencies, capital expenses, or even due to tax-friendly deductions such as additional depreciation or exemptions under Sections like 10AA (Special Economic Zones). In the traditional system, all such losses could potentially be adjusted in future years, offering flexibility and long-term planning advantages.
What Changes Under the New Tax Regime?
The new concessional tax regime, introduced under Section 115BAC for individuals and Hindu Undivided Families (HUFs), and Sections 115BAA or 115BAE for corporates, simplifies taxation by reducing the rates but also strips away a host of deductions and exemptions. This shift in structure comes with a direct consequence: certain carried-forward losses may no longer be recognised or usable.
The Central Board of Direct Taxes (CBDT) has clarified that if the losses carried forward from earlier years are linked to deductions or benefits that are not available under the new regime, those losses cannot be carried forward once the switch is made. These include:
- Additional depreciation on machinery and plant
- Deductions under Section 10AA for SEZ units
- Deductions under Chapter VI-A such as Section 80-IA (infrastructure), 80-IB, etc.
In other words, any component of business loss that owes its existence to such disallowed exemptions gets disqualified under the new tax regime.
An Example to Illustrate
Let’s say your company claimed additional depreciation of ₹30 lakh over the last few years, which contributed to an accumulated business loss of ₹80 lakh. Now, if you switch to the new regime, the portion of ₹30 lakh (linked to the now-disallowed depreciation) cannot be carried forward. Only the remaining ₹50 lakh—provided it’s purely from regular operations and not tied to any restricted exemptions—may still be considered, subject to other compliance norms.
Treatment of Standard Business Losses
The silver lining is that not all losses are off-limits. Losses incurred from standard business activities—such as operational overheads, cost overruns, or market downturns—may still be carried forward under the new regime, provided they are not associated with deductions that are specifically disallowed.
However, all of this remains conditional on timely filing of income tax returns and proper maintenance of financial records. If these procedural aspects are not fulfilled, even eligible losses could be disqualified for carry forward.
One-Time Switch: No Going Back for Businesses
Unlike salaried taxpayers, who can toggle between the old and new tax regimes every year, business owners and corporate taxpayers get only one shot. Once you opt for the new regime, the decision is binding for all subsequent years. This irreversible switch means that any forfeited losses due to disallowed deductions are permanently lost—you can’t reclaim or offset them even if the new regime turns out to be less beneficial in the long run.
This makes the decision all the more critical. It’s not just about immediate tax savings, but also about understanding the long-term trade-offs.
Key Considerations Before You Make the Move
If your business has accumulated significant losses over the years, it’s essential to evaluate them in detail before switching to the new tax regime. Ask your tax advisor or accountant to segregate losses:
- How much is due to deductions like additional depreciation or SEZ benefits?
- How much comes from regular operational losses?
- Are you in a position to offset those losses within the remaining allowed period in the old regime?
- Will the tax savings under the new regime outweigh the potential benefits of offsetting losses?
In many cases, sticking with the old regime for a few more years until losses are fully adjusted may make better financial sense.
Conclusion
The new tax regime offers simplicity and lower rates, but that comes with a price—especially for business owners with carried-forward losses. While it might be tempting to switch for immediate gains, the long-term implications on your ability to offset past losses can be significant.
Given that the choice is permanent for businesses, this decision should be backed by a thorough evaluation of your tax history and future projections. If handled wisely, this could optimise your tax planning. If not, you might end up losing more than you save.
