Set Off & Carry Forward of Losses - Sections 108 to 121 | Inter-Head & Intra-Head Rules
Key Takeaways
- Intra-head set off (Section 108): Loss from one source can be set off against income from another source under the same head, with specific exceptions. (Previously Section 70 of the Income Tax Act, 1961.)
- Inter-head set off (Section 109): Loss from one head can be set off against income from another head, subject to important restrictions. (Previously Section 71.)
- House property loss can be set off against other heads only up to Rs. 2,00,000 per year; balance is carried forward for 8 years under Section 109 (previously Section 71B).
- Business loss can be carried forward for 8 tax years and set off only against business income under Section 110 (previously Section 72).
- Capital loss can only be set off against capital gains (LTCL only against LTCG); carry forward for 8 years under Section 111 (previously Section 74).
Step 1: Intra-Head Set Off (Section 108 of the Income Tax Act, 2025, previously Section 70)
Loss from one source is first set off against income from another source under the same head of income. Key exceptions:
| Cannot Set Off | Against | |---------------|---------| | Long-term capital loss | Short-term capital gains | | Speculative business loss | Non-speculative business income | | Loss from owning and maintaining race horses | Any other income | | Loss from specified business u/s 46 (previously 35AD) | Other business income (only against specified business income) | | Loss from crypto/VDA | Any other income including other VDA income |
Allowed: Short-term capital loss CAN be set off against both short-term and long-term capital gains. Non-speculative business loss CAN be set off against speculative business income.
Step 2: Inter-Head Set Off (Section 109 of the Income Tax Act, 2025, previously Section 71)
After intra-head set off, remaining losses can be set off against income from other heads, subject to these critical restrictions:
| Loss from Head | Can Be Set Off Against | Restriction | |---------------|----------------------|-------------| | House Property | Any other head | Maximum Rs. 2,00,000 in a year | | Business/Profession | Any head EXCEPT Salary | Cannot set off against salary income | | Capital Gains | CANNOT be set off against any other head | Must remain under capital gains only | | Other Sources | Any other head | General losses can be set off; gambling/race horse losses cannot | | Speculative Business | Only speculative business income | Cannot be set off inter-head |
Important: Loss from salary income (practically impossible as salary cannot be negative after deductions) and loss from "other sources" from the activity of owning race horses can only be set off against race horse income.
Step 3: Carry Forward of Unabsorbed Losses (Sections 108 to 119 of the Income Tax Act, 2025)
| Type of Loss | Carry Forward Period | Set Off Against | Section (2025 Act) | Previously | Must File Return on Time? | |-------------|---------------------|----------------|---------------------|-----------|--------------------------| | House property loss | 8 tax years | House property income only | 109 | 71B | No | | Business loss (non-speculative) | 8 tax years | Business income only | 110 | 72 | Yes | | Speculative business loss | 4 tax years | Speculative business income only | 113 | 73 | Yes | | Specified business loss (Sec 46) | Indefinite | Specified business income only | 110 | 73A | Yes | | Capital loss (STCL) | 8 tax years | STCG or LTCG | 111 | 74 | Yes | | Capital loss (LTCL) | 8 tax years | LTCG only | 111 | 74 | Yes | | Loss from race horses | 4 tax years | Race horse income only | 115 | 74A | Yes | | Unabsorbed depreciation | Indefinite | Any income (any head) | 33(2) | 32(2) | No |
Critical: The condition for carry forward (previously Section 80 of the Income Tax Act, 1961, now embedded within the respective sections) mandates that losses (except house property loss and unabsorbed depreciation) can be carried forward ONLY if the return of income for the loss year is filed on or before the due date under Section 263 (previously Section 139(1)). Late filing = loss of carry forward benefit.
Order of Set Off
The statutory order of priority is:
- Current year depreciation
- Brought forward business losses
- Unabsorbed depreciation of earlier years
This order was confirmed by the Supreme Court and ensures that time-limited losses (8 years) are set off before unlimited ones (unabsorbed depreciation).
Special Restrictions
Section 119 of the Income Tax Act, 2025 (previously Section 79) - Change in Shareholding (Closely-Held Companies)
Losses of a closely-held company cannot be carried forward if there is a change in shareholding (shares carrying 51%+ of voting power are not beneficially held by the same persons on the last day of the tax year and on the last day of the year in which the loss was incurred). Exceptions apply for companies whose change results from death or gift, and for eligible start-ups.
Section 119 also covers search case restrictions (previously Section 79A)
Where a search under Section 247 (previously Section 132) is initiated, losses of the year of search and earlier years cannot be set off against undisclosed income assessed for such years.
Landmark Judgement
Case: CIT v. Harprasad & Co. Pvt. Ltd.
Court: Supreme Court of India
Year: 1975
Ruling: The Supreme Court held that once the Income Tax Officer has determined and assessed the loss of a particular year, the assessee acquires a right to have the loss carried forward and set off in subsequent years. The ITO cannot re-examine or recompute the loss during the set-off year. The loss crystallised and determined in the assessment for the loss year becomes final and binding.
Impact: This is a foundational ruling protecting taxpayers' right to carry forward losses. Once a loss is assessed and quantified, it cannot be disturbed in subsequent years during the set-off process. Taxpayers should ensure losses are properly computed and reflected in the assessment order for the loss year to preserve their carry forward rights under Sections 108-121 of the Income Tax Act, 2025.
Worked Example
Mr. Vikram has the following income and losses for Tax Year 2025-26:
| Head of Income | Source | Amount (Rs.) | |---------------|--------|-------------| | Salary | Employment | 10,00,000 | | House Property A (let-out) | Rental income after Section 22 deductions | (3,50,000) [Loss] | | House Property B (self-occupied) | Section 22(b) interest | (2,00,000) [Loss] | | Business (non-speculative) | Trading | (4,00,000) [Loss] | | Business (speculative) | Derivatives | 1,50,000 | | STCG | Listed shares | 2,00,000 | | LTCL | Property sale | (1,50,000) | | Other Sources | FD interest | 80,000 |
Step 1: Intra-Head Set Off
| Head | Computation | |------|------------| | House Property | Loss: (-3,50,000) + (-2,00,000) = (5,50,000) | | Business | Speculative profit 1,50,000. Non-speculative loss (4,00,000) can be set off against speculative: 1,50,000 - 4,00,000 = (2,50,000) net loss | | Capital Gains | STCG: 2,00,000. LTCL (1,50,000) CANNOT be set off against STCG. Net STCG = 2,00,000. LTCL carried forward. |
Step 2: Inter-Head Set Off
| Set Off | Against | Amount (Rs.) | |---------|---------|-------------| | House property loss (5,50,000) | Salary, STCG, Other Sources | Limited to Rs. 2,00,000 | | Set off of Rs. 2,00,000 HP loss | Against salary | Salary becomes 8,00,000 | | Balance HP loss | 3,50,000 carried forward u/s 109 | | | Business loss (2,50,000) | Against STCG (2,00,000) and Other Sources (80,000) | Set off 2,80,000; Balance 0 (but cannot set off against salary) | | Business loss remaining | 2,50,000 - 2,00,000 - 80,000 = NIL (since 2,80,000 < 2,50,000... actually need to re-check) |
Let me correct: Business loss of 2,50,000 set off against: Other Sources 80,000 = remaining 1,70,000. Cannot set off against Salary. Carried forward.
Wait - business loss CAN be set off against capital gains. So: 2,50,000 set off against STCG 2,00,000 = remaining 50,000; then against Other Sources 80,000 = fully absorbed. Other sources remaining = 30,000.
Final Taxable Income:
| Head | Amount (Rs.) | |------|-------------| | Salary | 10,00,000 - 2,00,000 (HP loss) = 8,00,000 | | Capital Gains | 2,00,000 - 2,00,000 (business loss) = NIL | | Other Sources | 80,000 - 50,000 (remaining business loss) = 30,000 | | Total Income | 8,30,000 |
Carried forward: HP loss Rs. 3,50,000 (8 years under Section 109); LTCL Rs. 1,50,000 (8 years under Section 111).
Expert Tip
CA Vrajkishor Changani says: The single most critical rule in loss provisions under the Income Tax Act, 2025 is that losses must be reported in returns filed on time (before the due date under Section 263) to preserve carry forward rights. I have seen countless taxpayers lose lakhs of rupees in carry forward benefits because they filed returns a few days late. Set a reminder for July 31 (or the extended due date). Also, strategically plan the sale of loss-making investments near year-end to harvest capital losses that can offset capital gains. This "tax-loss harvesting" is perfectly legal and can save significant tax, especially with the new 12.5% LTCG rate under Section 197 of the Income Tax Act, 2025.
Section Interconnect
- Also read: Chapter 4 - Income from House Property (understand how house property loss arises and the Rs. 2,00,000 cap under Section 109)
- Also read: Chapter 5 - Business & Profession (business loss computation and speculative vs non-speculative classification)
- Also read: Chapter 6 - Capital Gains (capital loss rules are distinct; LTCL can only offset LTCG under Section 111)
Frequently Asked Questions
Q1: Can I carry forward losses if I file a belated return?
No, with one exception. Business losses (Section 110), speculative losses (Section 113), capital losses (Section 111), and race horse losses (Section 115) of the Income Tax Act, 2025 can only be carried forward if the return is filed within the due date under Section 263. However, house property loss (Section 109) and unabsorbed depreciation (Section 33(2)) can be carried forward even if the return is filed late.
Q2: If I have both current year depreciation and brought forward business loss, which gets priority?
Current year depreciation is deducted first (as it is a current year allowance), then brought forward business losses, and finally unabsorbed depreciation of earlier years. This order benefits the taxpayer because business losses have an 8-year time limit while unabsorbed depreciation has no time limit.
Q3: Can a salaried person set off business losses against salary income?
No. Section 109 of the Income Tax Act, 2025 (previously Section 71(2A)) specifically prohibits the set off of business loss against salary income. However, house property loss (up to Rs. 2,00,000) and losses from other sources can be set off against salary income. If you have a side business with losses, those losses can only be set off against other non-salary income or carried forward.
Disclaimer: This article is for educational purposes only and does not constitute legal or tax advice. Tax laws are subject to amendments. Please consult qualified CAs for advice specific to your situation.
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