Set-off and Carry Forward of Losses: Complete Guide (Income Tax Act 2025)

Under the Income-tax Act, 2025, a loss is used in a fixed order. First it is set off against other income under the same head (section 108), then against other heads (section 109), and whatever is left is carried forward to later tax years (sections 110 to 112). Business, house property and capital gains losses can each be carried forward for up to eight tax years, but each can then be used only against a limited kind of income. House property loss is set off against other heads only up to Rs 2,00,000 in a tax year.

This guide walks through each rule with the section number beside it, two worked calculations and some everyday scenarios. All figures come from the Act as amended by the Finance Act, 2026, effective 1 April 2026. Examples use tax year 2026-27 and are for information, not tax advice.

In what order is a loss set off under the Income Tax Act 2025?

Each step has exceptions, set out below. A loss that is wholly used at step 1 or 2 is never carried forward.

How does set-off under the same head work (section 108)?

Section 108(1) says that if the net result from one source under a head (other than capital gains) is a loss, you may set it off against income from any other source under the same head in that tax year. A loss from one shop can be set off against profit from another business, because both fall under "Profits and gains of business or profession".

Capital gains work differently, under section 108(2). The result is worked out under sections 72 to 90 for each asset:

• A short-term capital loss can be set off against income from any other capital asset, short-term or long-term.
• A long-term capital loss can be set off only against income from another long-term capital asset.

Can a loss be set off against income under another head (section 109)?

Yes, with three limits. Under section 109(1), a loss under any head other than capital gains is set off against income under any other head for that tax year, including capital gains. The exceptions are:

• a business or profession loss cannot be set off against salary (section 109(1)(a));
• a house property loss can be set off against other heads only to the extent of Rs 2,00,000 (section 109(1)(b)); and
• a capital gains loss cannot be set off against any other head (section 109(2)).

Which loss can be carried forward, for how long and against what?

Loss	Section	Carried-forward loss can be set off against	Maximum years
House property	110	Income from house property only	8 tax years after the loss year
Capital gains: short-term	111(1)(a)(i)	Capital gains from any other capital asset	8 tax years after the loss year
Capital gains: long-term	111(1)(a)(ii)	Capital gains from other long-term capital assets only	8 tax years after the loss year
Business or profession (not speculation)	112	Profits of any business or profession carried on by you	8 tax years after the loss year
Speculation business	113	Profits of a speculation business only	4 tax years after the loss year
Specified business (section 46)	114	Profits of a specified business only	No limit stated in section 114
Owning and maintaining race horses	115	Income from that activity only	4 tax years after the loss year

Rows 5 to 7 are outside the five sections this guide is built on. They are in the table so you can see where they sit. Read sections 113 to 115 before relying on them.

The eight years count from the year after the loss year. A loss first computed in tax year 2026-27 can be used up to tax year 2034-35, and not after.

How is a business loss carried forward under section 112?

If a business or profession loss (other than a speculation loss) cannot be wholly set off against other heads under section 109, the balance is carried forward and set off against the profits of any business or profession you carry on in the following year, and then the year after, up to eight years (section 112(1) and (2)). It does not have to be the same business that made the loss. It cannot be set off against salary, house property or other income in those later years.

Where unabsorbed depreciation under section 33(11) or an unabsorbed deduction under section 45(7) is also to be carried forward, effect is first given to section 112 (section 112(3)). So the carried-forward business loss is used before those amounts.

Rule 100 contains a safe harbour for some eligible businesses. If an assessee has exercised that option and it is not declared invalid, no set-off of unabsorbed depreciation under section 33(11), or of a carried-forward loss under section 112(1), is allowed to that assessee (rule 100(3)(c)). Rule 100(3)(d) also bars set-off of losses from other businesses or other heads against income from that business.

How is house property loss carried forward (section 110)?

Loss under "Income from house property" is first set off against other heads, up to Rs 2,00,000 (section 109(1)(b)). The part that cannot be set off is carried forward and set off only against income from house property in the next year, and so on for up to eight tax years (section 110). For how that loss arises, see our guide to house property loss set-off and carry forward.

How are capital losses carried forward (section 111)?

Capital losses must first be set off against capital gains in the same year (section 108(2)). Any balance moves forward for up to eight years under section 111, with the same split as in the same-year rule. A carried-forward short-term loss can meet gains on any other capital asset, and a carried-forward long-term loss can meet only long-term gains.

Do you have to file a return to carry a loss forward?

For most losses, yes. Section 121 says a loss not determined in a return filed under section 263(1) cannot be carried forward and set off under sections 111(1), 112(1), 113(2), 114(2) or 115(2). Section 110 (house property) is not in that list. Even so, file the return showing the loss, so the figure is on record.

When is a loss not allowed to be carried forward or set off?

• Search, requisition or survey. No loss, brought forward or otherwise, and no unabsorbed depreciation can be set off against undisclosed income found in a search (section 247), requisition (section 248) or survey (section 253, other than 253(4)) (section 120).
• Firm with a retiring or deceased partner. The loss proportionate to that partner's share, above his share of profits for the year, cannot be carried forward (section 119(1)).
• Succession in business. If someone other than an heir takes over the business, only the person who incurred the loss can carry it forward (section 119(2)).
• Closely held company. If shareholding changes during the year, earlier losses are carried forward only if shares with at least 51% of voting power are held by the same persons as on the last day of the loss year (section 119(3)). Exceptions, including death or gift to a relative, are in section 119(4).

What happens to losses brought forward from before 1 April 2026?

They are not lost. Section 536(2)(m) lets house property, business, speculation, specified business and race horse losses brought forward from tax years beginning before 1 April 2026 be set off in the manner of the repealed Act's corresponding sections, against income computed under the new Act. Section 536(2)(n) does the same for capital gains losses, up to eight financial years after the year in which the loss was first computed.

Worked example 1: house property loss with salary and interest (tax year 2026-27)

Assumptions: Ravi earns salary income of Rs 9,00,000 and interest under "Income from other sources" of Rs 1,00,000. His let-out flat shows a net loss under house property of Rs 3,20,000. Tax year 2026-27.

Step	Working	Amount (Rs)
1	House property loss for the year	3,20,000
2	Maximum set off against other heads (section 109(1)(b))	2,00,000
3	Salary plus interest before set-off (9,00,000 + 1,00,000)	10,00,000
4	Income after set-off (10,00,000 - 2,00,000)	8,00,000
5	Loss carried forward (3,20,000 - 2,00,000)	1,20,000

The Rs 1,20,000 can be set off only against house property income in tax year 2027-28 and later, up to tax year 2034-35 (section 110).

Worked example 2: business loss with several heads (tax year 2026-27)

Assumptions: Meena runs a consulting business that made a loss of Rs 5,00,000. She also has salary of Rs 6,00,000, house property income of Rs 1,50,000, interest of Rs 60,000 and a short-term capital gain of Rs 80,000. Tax year 2026-27.

Income head	Income (Rs)	Business loss set off (Rs)	Left (Rs)
Salary	6,00,000	0 (not allowed, section 109(1)(a))	6,00,000
House property	1,50,000	1,50,000	0
Other sources	60,000	60,000	0
Capital gains (short-term)	80,000	80,000	0
Total set off		2,90,000

1. Business loss for the year: Rs 5,00,000.
2. Loss set off against other heads: 1,50,000 + 60,000 + 80,000 = Rs 2,90,000.
3. Loss carried forward under section 112: 5,00,000 - 2,90,000 = Rs 2,10,000.
4. If she earns a business profit of Rs 1,40,000 in tax year 2027-28, that profit is set off against the carried-forward loss first. Balance carried forward: 2,10,000 - 1,40,000 = Rs 70,000.

Worked example 3: short-term and long-term capital losses

	Case A: short-term loss	Case B: long-term loss
Loss	Rs 1,50,000	Rs 90,000
Gains in the same year	Short-term Rs 40,000, long-term Rs 70,000	Short-term Rs 2,00,000, long-term Rs 30,000
Can be set off against	Both (section 108(2)(a)): 40,000 + 70,000 = 1,10,000	Long-term only (section 108(2)(b)): 30,000
Carried forward	1,50,000 - 1,10,000 = Rs 40,000	90,000 - 30,000 = Rs 60,000
Can be used later against	Any other capital asset gains	Long-term gains only

Real-life scenarios

Kabir, whose shop made a loss. Kabir runs two shops. One lost Rs 80,000 and the other earned Rs 2,00,000. Both are under the business head, so section 108(1) lets him set the loss off against the profit at once. He reports Rs 1,20,000 of business income and carries nothing forward.

Anita, a salaried employee with a failed side business. Anita's side business lost Rs 3,00,000. She has no other income except her salary. Section 109(1)(a) stops her setting it against salary, so the full Rs 3,00,000 is carried forward under section 112. It can reduce profit from any business she carries on in the next eight tax years.

Suresh, who sold shares at a long-term loss. Suresh has a long-term capital loss and a large salary. Section 109(2) stops the loss reducing his salary. The loss is carried forward and helps only if he has long-term capital gains in a later year.

Common mistakes

• Setting a business loss off against salary. Section 109(1)(a) does not allow it.
• Setting a house property loss off without the Rs 2,00,000 cap. Only Rs 2,00,000 can go against other heads in a year; the rest is carried forward.
• Using a long-term capital loss against short-term gains. It can meet only long-term gains.
• Treating carried-forward loss as usable against any income. House property, capital gains and business losses each have a narrow set-off target in later years.
• Counting the years from the wrong date. The eight years start in the tax year after the loss year, and an old loss lapses at the end of that period.
• Forgetting the carried-forward balance. A loss that runs for years is easy to lose track of when files move between advisers.

Quick reference: limits at a glance

Rule	Limit	Section
House property loss against other heads	Rs 2,00,000 per tax year	109(1)(b)
Business loss against salary	Not allowed	109(1)(a)
Capital gains loss against other heads	Not allowed	109(2)
House property loss carry-forward	8 tax years after loss year	110(2)
Capital gains loss carry-forward	8 tax years after loss year	111(2)
Business loss carry-forward	8 tax years after loss year	112(2)
Speculation loss carry-forward	4 tax years after loss year	113(3)

How can a CA firm keep track of carried-forward losses?

The work is in the follow-up. Each client with a carried-forward balance needs the loss year, the type of loss, the amount used so far, and the last year it can be used. Finexo's practice management software can hold a note and a reminder against each client so these facts are visible when you prepare the next return. It does not compute the loss or file returns for you.

Where this is in the Act

• Section 108: set off of losses under the same head, including the capital gains rules in sub-section (2).
• Section 109: set off against other heads, the salary exclusion, the Rs 2,00,000 house property cap and the capital gains exclusion.
• Section 110: carry forward of house property loss, with the eight-year limit.
• Section 111: carry forward of capital gains loss, with the eight-year limit.
• Section 112: carry forward of business loss, including sub-section (3) on unabsorbed depreciation.
• Sections 113 to 115: speculation business, specified business and specified activity losses.
• Sections 116 to 118: accumulated loss in amalgamation, demerger and co-operative bank reorganisation. Section 119: cases where loss cannot be carried forward. Section 120: no set-off against search or survey income. Section 121: return needed for loss carry forward. Section 536(2)(m) and (n): pre-2026 losses.
• Rule 100: safe harbour, which bars set-off of unabsorbed depreciation and carried-forward losses for opted businesses.
• For which income is taxed in the first place, see scope of total income under the Income Tax Act 2025.