What is Negative Income Tax?

What is Negative Income Tax?

Understand what Negative Income Tax is, how it works, and how it can support low-income earners while reducing inequality

Written by : Knowledge Centre Team

2026-02-11

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11 minutes read

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Income tax is usually associated with deductions from earnings, but what if the system worked in reverse for low-income earners? This is the idea behind Negative Income Tax (NIT), an economic concept that flips the traditional tax model to provide direct financial assistance to those earning below a specified income level.

Instead of collecting taxes from low-income individuals, the government transfers money to them, ensuring a basic standard of living while encouraging employment and financial stability. In this blog, we will explain what Negative Income Tax (NIT) is, how it works, its benefits and challenges, and whether it could be relevant in India’s taxation framework. This will help you understand how such a system could reshape income distribution and social welfare policies.

Key Takeaways


  • Negative Income Tax (NIT) ensures a basic living standard by providing government cash transfers to those earning below a specific threshold 
  • As per Section 139(3), self-employed individuals must file an ITR during loss-making years to remain eligible for future tax benefits
  • Filing a "Loss Return" allows you to carry forward current business or capital losses to reduce your tax liability against future profits
  • To carry forward most losses for future adjustment, you must strictly file your return before the official government due date
  • Unlike business losses, "House Property" losses can be carried forward and offset even if the ITR is filed after the deadline

What is Negative Income Tax?

What is an Income Tax?

Income tax is defined as the tax paid on the income earned by individuals and entities such as companies or partnerships. The Indian taxation system is defined as progressive, which means that the higher the amount of income you earn, the higher the tax you are liable to pay.

There are several tax brackets, which increase in accordance with increasing income. However, the taxation system for salaried employees differs quite significantly from the taxes levied on self-employed individuals or those running their own personal business.

If you have ever wondered what a negative income tax is and whether it applies to you, you should continue reading below.

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What is Negative Income Tax?

Negative Income Tax (NIT) is a welfare-oriented tax system in which individuals earning below a specified income threshold receive financial assistance from the government instead of paying taxes. Under this system, if a person’s income falls below the minimum level set by the government, they are entitled to a cash transfer to help meet basic living expenses. 

The idea is to ensure a minimum standard of living while encouraging people to work, as the support gradually decreases as their income rises. Economists view NIT as a way to reduce poverty, simplify social welfare programs, and create a more equitable income distribution. If you are concerned about your investment instruments and the returns you are earning on them, you should consider investing in ULIP Plans. This Unit Linked Insurance Plan (ULIP) not only offers both coverage and returns but also enables you to invest across 7 different funds with the option to choose from 4 different investment strategies.

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Did You Know?

Milton Friedman proposed the Negative Income Tax in 1962 to replace complex welfare with a single, efficient cash transfer via the tax department


Source: NBER

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What are the Provisions Under Section 139(3), Income Tax Act?

The Income Tax Act, 1961, lists different provisions, deductions, and exemptions applicable to individuals and entities who are liable to pay taxes in India. Section 139(3) of the Act refers to the Negative Income Tax provisions, and states that companies, firms, and self-employed persons are required to file income tax returns (ITR) even if losses have been suffered by them in the year under review.

Filing an ITR in the year you suffer losses allows you to offset those losses in future years. This can be done by adjusting profits in the following years with losses in the current year, and furthermore, this ensures that your profits in the following year do not significantly increase your tax burden.

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There are several provisions with regard to filing ITRs under Section 139(3) of the Income Tax Act, 1961. Read on below to learn about what a Negative Income Tax is, and whether you need to file an ITR if you have suffered a loss this year.

  • ITRs have to be filed for losses that have been incurred under the  “Capital Gains” or “Profits and Gains” of Business and Profession heads, if you wish to offset the loss of the current year and profits from the following years

  • It is important to file ITRs within the due date if you wish to offset those losses. However, even if you have failed to file ITR for losses in the current year within the due date, it is possible for you to carry forward losses of previous years if the ITRs filed in previous years were before the due date, and have already been assessed by the relevant authority.

  • If the losses sustained in your capacity as a self-employed individual or a legal entity can be set off against any income earned in the same accounting year, that will be allowed even if the ITR is filed later than the due date. That is why, even if you have a business, it is advisable to invest a certain sum towards ULIPs plan. The fund allows you to flexibly choose between 7 different funds and utilise 4 different portfolio strategies to take complete advantage of the prevailing market situation, as well as align with your changing risk preference.

  • An ITR need not be filed if the losses have incurred under the head of “House Property”. Losses suffered under this head can be carried forward even with the returns being filed post the due date. This allows individuals with housing loans to continue reaping the benefit of earning deduction on their interest payment of the loan, even if they file the ITR late, owing to Section 24 under the Income Tax Act, 1961.

Wrapping Up

Filing of ITRs is an essential duty of every Indian citizen. It allows you to maintain your taxation records in an organised way and allows you to reap benefits in the future. However, if you are currently facing losses owing to your business, it is best to look for benefits early and invest in ULIPs. This plan not only gives you coverage for your life and ensures your dependents are taken care of, but also allows you to make partial withdrawals in the near future to meet any unexpected financial emergencies.

Glossary

  1. Negative Income Tax (NIT): A tax system where low-income individuals receive money from the government instead of paying tax
  2. ITR: A form filed with the tax department detailing income, deductions, and taxes paid during a year
  3. Capital Gains: Profit earned from selling assets like property, shares, or gold
  4. Due Date: The deadline by which an ITR must be filed to claim certain benefits, like loss carry-forward
  5. Section 139(3): Provision that allows filing ITR to carry forward certain losses
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FAQs

A negative tax due or negative tax payable occurs when your total tax liability becomes less than zero because deductions, exemptions, or credits (or provisions similar to Negative Income Tax) exceed the tax you owe. In such cases, instead of owing tax, you may receive a refund or credit from the government when you file your income tax return.

If your taxable income ends up in a negative figure after accounting for deductions and losses, it means you don’t owe any tax for that year. When your tax balance is negative upon filing ITR, you may be eligible for a refund if excess tax was already paid via TDS or advance tax.

Not always. A negative tax balance suggests your tax credits and deductions exceed your tax liability. If you’ve already paid tax through TDS or advance tax, you may get a refund when the ITR is processed. Otherwise, the negative balance may simply reduce your payable tax to zero.

It indicates a situation where your allowable deductions, loss adjustments (like carry forward of business or capital losses), or tax credits reduce your total assessed tax below zero. In practice, this means you either owe no tax or may receive a refund after ITR filing.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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