Filing a Return to Carry Forward Losses: Section 121 of the Income Tax Act 2025

Under section 121 of the Income-tax Act, 2025, a business loss, capital loss, speculation loss, specified business loss or race-horse loss can be carried forward only if it was determined in a return filed under section 263(1), that is, a return filed on or before the due date. A return filed late under section 263(4) does not qualify. If you miss the due date, the loss can still be set off in the same year, but it cannot move to later years.

This guide explains which losses are covered, the due dates in section 263(1)(c), what happens with a belated, revised or updated return, and how it plays out with numbers. Every figure is from the Act as amended by the Finance Act, 2026, with the section number alongside. Last reviewed against that text on 10 November 2026.

What does section 121 say about carrying forward losses?

Section 121 begins "irrespective of anything contained in this Chapter" (Chapter VII, set off and carry forward of losses). It says that no loss that has not been determined in pursuance of a return filed under section 263(1) shall be carried forward and set off under:

• section 111(1): capital gains loss;
• section 112(1): business loss (other than speculation);
• section 113(2): speculation business loss;
• section 114(2): specified business loss; and
• section 115(2): loss from the specified activity of owning and maintaining race horses.

Section 110 (house property loss) is not in this list. Section 121 therefore does not name house property loss, and neither does section 263(1)(a)(viii), which covers only business and capital gains losses. If you have a house property loss, read our guide on house property loss set-off and carry forward for its own carry-forward rules.

Who must file a return to claim a loss carry forward?

Section 263(1)(a)(viii) lists "a person who has sustained a loss in the tax year under the head 'Profits and gains of business or profession' or under the head 'Capital gains' and who intends to claim that such loss, or any part thereof, is to be carried forward". Such a person must furnish a return even if the income is below the basic exemption limit. The return must reach the department by the due date, which depends on who you are.

What is the due date for the return of loss?

Section 263(1)(c) fixes the due date as a date in the financial year after the tax year. For tax year 2026-27 (ending 31 March 2027), the financial year after is 2027-28, so the dates fall in 2027.

Who (section 263(1)(c), Table)	Due date	Date for tax year 2026-27
Assessee (including a partner or the partner's spouse) where section 172 applies, that is, a report from an accountant for an international or specified domestic transaction (Sl. No. 1)	30 November	30 November 2027
Company; assessee (other than a company) whose accounts must be audited; partner of a firm whose accounts must be audited, or such partner's spouse, where section 172 does not apply (Sl. No. 2)	31 October	31 October 2027
Assessee with business or professional income whose accounts need not be audited; partner of a firm whose accounts need not be audited, or such partner's spouse, where section 172 does not apply (Sl. No. 3)	31 August	31 August 2027
Any other assessee (Sl. No. 4)	31 July	31 July 2027

So a trader with unaudited books who has a Rs 4 lakh business loss for 2026-27 has to file by 31 August 2027 to be able to carry it forward. An individual whose only loss is a capital loss, with no business income, falls under "any other assessee", so the date is 31 July 2027.

What happens to losses from before 1 April 2026?

Losses brought forward from tax years beginning before 1 April 2026 do not start afresh. Section 536(2)(m) says a loss under house property, business or profession, speculation business, specified business or race-horse activity, brought forward from before that date, is set off and carried forward against income computed under this Act in the manner provided in the respective section of the repealed Income-tax Act, 1961. Section 536(2)(n) does the same for capital gains losses (short-term or long-term), allowing set off against capital gains for up to eight financial years after the year the loss was first computed under the repealed Act.

In practice, an old loss keeps its original clock. A loss first computed in 2022-23 does not get eight fresh years from 2026-27, and its eligibility was decided by whether the return was filed on time under the old law. Keep old and new losses in separate lines of your register.

How do the return types compare for a loss?

Return	Section	Time limit	Loss carry forward?
Return by the due date	263(1)	Due date in the table above	Yes, if the loss is determined in it
Belated return	263(4)	Within nine months from the end of the tax year, or before assessment is completed, whichever is earlier	No, because section 121 asks for a return under 263(1)
Revised return	263(5)	Within twelve months from the end of the tax year, or before assessment is completed, whichever is earlier	It corrects an original return that was filed under 263(1) or (4)
Updated return	263(6)	Within 48 months from the end of the financial year after the tax year	Not allowed if it is a return of loss, except as 263(6)(b)(i) provides

The first row matters most. A belated return under section 263(4) lets you report income late, but a loss first computed in that return is not a loss "determined in pursuance of a return filed under section 263(1)".

How long can each loss be carried forward?

Loss	Carry forward section	Set off against	Maximum period
Short-term capital loss	111(1)(a)(i)	Capital gains from any other capital asset	8 tax years (111(2))
Long-term capital loss	111(1)(a)(ii)	Long-term capital gains only	8 tax years (111(2))
Business loss (not speculation)	112(1)	Profits of any business or profession	8 tax years (112(2))
Speculation business loss	113(2)	Speculation business profits	4 tax years (113(3))
Specified business loss (section 46)	114(2)	Specified business profits	No limit stated in section 114
Race-horse (specified activity) loss	115(2)	Income of that specified activity	4 tax years (115(3))

The period is counted from the tax years "immediately succeeding" the year in which the loss was first computed. A business loss of tax year 2026-27 can therefore be set off up to the eighth succeeding tax year, 2034-35.

How does a business loss carry forward work? Worked example

Ravi runs an unaudited trading business. For tax year 2026-27 he has a business loss of Rs 4,00,000 and interest income of Rs 1,50,000 under "Income from other sources". He files his return on 20 August 2027, before the 31 August 2027 due date (section 263(1)(c), Sl. No. 3). Assumptions: no other income, no other losses.

Step	Working	Amount (Rs)
1. Business loss, 2026-27		4,00,000
2. Set off against other heads (section 109(1), not against salary)	Interest income absorbs it	1,50,000
3. Loss to carry forward (section 112(1))	4,00,000 - 1,50,000	2,50,000
4. Business profit, 2027-28		3,00,000
5. Brought-forward loss set off	Lower of 2,50,000 and 3,00,000	2,50,000
6. Business income taxable in 2027-28	3,00,000 - 2,50,000	50,000

Because the return was filed by the due date, the Rs 2,50,000 is allowed to move forward. Had Ravi filed on 15 October 2027, section 121 would have blocked step 3, and the full Rs 3,00,000 profit of 2027-28 would be taxable.

What happens to a capital loss if the return is late? Worked example

Meena sells listed shares held for the long term and books a long-term capital loss of Rs 1,20,000 in tax year 2026-27. She has no other capital gains that year. Next year she has a long-term capital gain of Rs 80,000. We compare two filing dates. Assumptions: no other losses; she falls under "any other assessee", so the due date is 31 July 2027.

	Return filed 25 July 2027	Return filed 12 October 2027 (belated, section 263(4))
Long-term loss, 2026-27	Rs 1,20,000	Rs 1,20,000
Loss that can be carried forward	Rs 1,20,000	Nil (section 121)
Long-term gain, 2027-28	Rs 80,000	Rs 80,000
Set off in 2027-28	Rs 80,000	Nil
Taxable long-term gain, 2027-28	Nil	Rs 80,000
Loss still to carry forward	Rs 40,000 (1,20,000 - 80,000)	Nil

The remaining Rs 40,000 under section 111(1)(a)(ii) can be set off against long-term gains in later years, up to eight tax years after 2026-27. A long-term loss cannot be set off against short-term gains (section 111(1)(a)(ii)). Tax on the gain is not computed here, as the rate depends on the asset.

Real-life examples: what goes right and wrong

Kavita, salaried freelancer. Kavita earns a salary and runs a small design side business that made a loss in 2026-27. She assumes the loss will reduce her salary tax. Section 109(1)(a) says a business loss cannot be set off against salary. The loss can only be carried forward against future business profit under section 112(1), and only if her return is filed by the due date.

Sunil, intraday trader. Sunil has a speculation business loss for 2026-27 and a profit from a separate speculation business in the same year. Section 113(1) lets him set it off against that profit. Any balance can be carried forward against speculation profit for four tax years (section 113(3)), again only through a return filed by the due date.

Anjali, forgot the deadline. Anjali is a retailer with no audit requirement and a Rs 2,00,000 business loss. She remembers in October and files under section 263(4). Her return is valid and the department accepts it, but the Rs 2,00,000 cannot be carried forward. She does not get a second chance through the updated return route either, because section 263(6)(c)(i) bars an updated return that is a return of loss.

Can I fix a return of loss after filing it?

• Revised return. If you find an omission or wrong statement, you can file a revised return within twelve months from the end of the tax year or before assessment, whichever is earlier (section 263(5)).
• Updated return. If you filed a return of loss within the due date, an updated return remains available when it is a return of income, or when it has the effect of reducing the loss (section 263(6)(b)(i)).
• Knock-on effect. If an updated return reduces a loss carried forward into later years, you must file an updated return for each such later year (section 263(6)(e)).

What are the common mistakes with carrying forward losses?

• Filing after the due date. A section 263(4) return is not enough for carry forward.
• Using the wrong due date. Audit status, partner status and section 172 reports change the date. Confirm the Sl. No. in the section 263(1)(c) table before filing.
• Not filing because income is below the exemption limit. Section 263(1)(a)(viii) requires a return from anyone who wants to carry forward a business or capital gains loss.
• Setting a business loss off against salary. Section 109(1)(a) does not allow it.
• Mixing long-term and short-term losses. A long-term loss only goes against long-term gains (section 111(1)(a)(ii)).
• Forgetting the year cap. Eight years for business and capital losses, four for speculation and race-horse losses.

How do CA firms keep track of loss registers across clients?

A loss is only useful if someone remembers it exists three years later. For a CA firm, the practical work is keeping a register of each client's carried-forward losses, the tax year they started and the last year they can be used, and filing the loss return before the correct due date. Finexo's practice management software tracks return due dates across your client book and reminds you and your clients before they pass, so the filing that protects a loss is not missed. It does not compute the loss or file the return for you.

Where is this in the Act?

• Section 121: no carry forward of a loss not determined in a return under section 263(1).
• Section 111: capital gains loss; section 112: business loss; section 113: speculation loss; section 114: specified business loss; section 115: specified activity (race horses) loss.
• Sections 108 and 109: set off of losses in the same year; section 110: house property loss carry forward.
• Section 263(1)(a)(viii) and (1)(c): who must file for a loss and the due dates.
• Section 263(4), (5), (6): belated, revised and updated returns.

• Section 536(2)(m) and (n): carry forward of losses brought forward from tax years before 1 April 2026.

For another worked guide in this series, see TDS on rent under the Income-tax Act, 2025.

This article explains the Income-tax Act, 2025 (as amended by the Finance Act, 2026). It is general information, not tax advice. Confirm the position for a specific case with a qualified chartered accountant.