Library / Income-tax Act, 2025: The Professional's Master Guide

15. Set Off and Carry Forward of Losses (Sections 108 to 121)

Loss	Set off in same year	Carry forward against	Years
House property (s.110)	Any head, max Rs. 2 lakh (old regime only)	House property only	8
Business, non-speculative (s.112)	Any head except salary	Business income only	8
Speculation business (s.113)	Speculation income only	Speculation income only	4
Specified business (s.114, old 73A)	Specified business only	Specified business only	No limit
Short-term capital loss (s.111)	STCG or LTCG	STCG or LTCG	8
Long-term capital loss (s.111)	LTCG only	LTCG only	8
Race horses (s.115)	Same source only	Same source only	4
Unabsorbed depreciation	Any head except salary	Any head except salary	No limit

Illustration 81: Order of set off

Deepak has salary Rs. 12,00,000, business loss Rs. 3,00,000, short-term capital loss on shares Rs. 1,00,000, and LTCG on land Rs. 4,00,000.

Step 1: STCL of Rs. 1,00,000 set off against LTCG, leaving Rs. 3,00,000. Step 2: business loss cannot go against salary, but can go against LTCG, leaving nil. Taxable income = salary Rs. 12,00,000.

Key point

Losses (other than house property loss and unabsorbed depreciation) can be carried forward only if the return for the loss year is filed by the due date (section 121).

For closely held companies, a change of more than 49% in beneficial shareholding kills brought forward losses (section 119). See the Corporate Tax part.

15.1 Set off rules explained

Intra head first: loss from one source is set off against income from another source under the same head (section 108), with exceptions: speculation loss only against speculation income; specified business loss only against specified business income; long-term capital loss only against LTCG; loss from owning race horses only against that activity; no loss can be set off against VDA income or winnings.
Inter head next: remaining loss can be set off against income under other heads (section 109), except that business loss cannot be set off against salary, and capital loss cannot be set off against any other head. House property loss is limited to Rs. 2 lakh against other heads.
Carry forward: remaining losses are carried forward only against the same kind of income, for the periods in the table above, provided the return was filed on time.
New regime restrictions: under section 202, house property loss cannot be set off against other heads, and losses or depreciation attributable to deductions not allowed in the new regime cannot be carried forward.

Illustration 82: Full set off computation

Kiran (old regime) has for Tax Year 2026-27: salary Rs. 9,00,000; loss from let out house Rs. 2,40,000; business income Rs. 1,50,000; speculation loss Rs. 60,000; STCG on shares (section 196) Rs. 80,000; LTCG on land Rs. 1,00,000; brought forward business loss of Tax Year 2024-25 Rs. 1,00,000; brought forward LTCL of Rs. 40,000.

Head	Amount (Rs.)	Working
Salary	9,00,000
Less: house property loss (limit Rs. 2 lakh)	(2,00,000)	Rs. 40,000 carried forward
Salary after set off	7,00,000
Business income	1,50,000	Speculation loss of Rs. 60,000 cannot be set off; carried forward 4 years
Less: brought forward business loss	(1,00,000)	Allowed against business income only
Business income after set off	50,000
STCG (section 196)	80,000	Taxed at 20%
LTCG on land	1,00,000
Less: brought forward LTCL	(40,000)	LTCL only against LTCG
LTCG after set off	60,000	Taxed at 12.5% (or 20% with indexation)
Gross total income	8,90,000

Chapter summary

• Intra head set off first, then inter head, then carry forward.

• Business loss cannot be set off against salary; capital loss only against capital gains.

• Losses are carried forward only if the return is filed by the due date (except house property loss and unabsorbed depreciation).

• New regime restricts house property loss set off.