Set Off and Carry Forward of Losses Under the Income tax Act, 2025: Complete Guide

Every loss provision in Chapter VII works through the same two stage logic. First, the law asks whether your loss from one source can be set off against your income from another source in the very same tax year. This is called set off. Second, if any part of the loss is left over after that, the law asks whether you are allowed to carry that leftover loss forward to a future tax year, to be set off against income earned then. This is called carry forward and set off.

The rules differ depending on which head of income the loss comes from. A loss from house property is treated differently from a loss in your business, which in turn is treated differently from a loss on the sale of shares or property. Understanding which head your loss falls under is therefore the first and most important step before you can work out what you are allowed to do with it.

Section 108 deals with the simplest case: a loss from one source set off against income from another source under the same head. For example, if you run two shops and one makes a profit while the other makes a loss, both fall under “Profits and gains of business or profession,” so the loss from one shop can be set off against the profit from the other in the same year. This applies to every head of income except capital gains, which has its own separate, more restrictive rule.

For capital gains specifically, Section 108(2) says a short-term capital loss can be set off against income from any other capital asset, whether short-term or long-term, in that year. A long-term capital loss, however, can only be set off against long-term capital gains. This distinction matters a great deal and is explained further in Part V of this article.

Section 109 governs what happens once you have set off whatever you could within the same head, and a loss still remains. This leftover loss can generally be set off against your income computed under any other head, including capital gains, in the same tax year, subject to two specific conditions.

First, a business loss can never be set off against salary income. If you are a salaried employee who also runs a small business on the side that makes a loss, that business loss cannot reduce the tax on your salary in the same year. It would need to be carried forward instead, as explained in Part VI.

Second, a house property loss can be set off against income under any other head only up to Rs 2,00,000 in that tax year. If the house property loss exceeds this amount, the excess cannot be adjusted against other income in the same year, no matter how large your other income is.

Section 109(2) adds one more important rule: a loss under the head “Capital gains” can never be set off against income under any other head, in any year. It can only be set off against other capital gains, as described in Part II above.

House property loss usually arises when the home loan interest you are allowed to deduct is larger than the rental income you earn, or when you own a self-occupied house with no rental income at all but still have home loan interest to claim. Section 110 explains what happens to this loss once the Rs 2,00,000 set off limit under Section 109 has been used up.

Whatever portion of the house property loss could not be set off in the current year, whether against other house property income or against other heads up to the cap, gets carried forward to the following tax year. In that following year, the carried forward loss can only be set off against income from house property, and against nothing else. If it still cannot be fully used, the remainder keeps carrying forward again, year after year.

Section 110(2) sets the outer limit: this carry forward is allowed for a maximum of eight tax years immediately following the year in which the loss was first computed. After the eighth year, any unused house property loss simply lapses.

Section 111 carries forward the same short-term and long-term separation that applies to set off in the current year. If a capital loss could not be wholly set off in the year it arose, it is carried forward to the following year, where short-term capital losses can be set off against gains from any capital asset, while long-term capital losses can be set off only against long-term capital gains.

Just like house property loss, capital loss can be carried forward for a maximum of eight tax years immediately following the year the loss was first computed. There is no provision anywhere in this chapter that allows a capital loss to be set off against income from salary, house property, business, or any other head, in the year it arises or in any later year.

Section 112 deals with ordinary, non-speculative business loss, meaning a loss under the head “Profits and gains of business or profession” that is not from a speculation business. If this loss cannot be wholly set off in the current year, because of the salary income bar under Section 109 or simply because there is not enough other income to absorb it, the remainder is carried forward to the following tax year.

In the following year, the carried forward business loss can only be set off against profits from any business or profession you carry on, not against salary, house property income, or capital gains. If it still cannot be fully absorbed, it continues to carry forward, subject again to the same eight tax year outer limit that applies to house property and capital losses.

One practical point worth noting from Section 112(3): if you also have unabsorbed depreciation to carry forward in the same year, the law requires that effect be given to the business loss carry forward provisions first, before the depreciation carry forward rules apply.

Speculation business gets its own separate compartment under Section 113. A loss from a speculation business can be set off only against profits from another speculation business, never against any other kind of income, not even other business profits. If it cannot be fully set off, it carries forward, but only for four tax years, not eight, and again it can only be set off against speculation business profits in those later years.

Section 113(5) contains a notable deeming rule for companies: if part of a company’s business consists of buying and selling shares of other companies, that part of the business is treated as a speculation business for this purpose, even if the company would not normally think of itself as a speculator. Section 113(6) carves out two exceptions to this deeming rule, for companies whose gross total income mainly comes from house property, capital gains, or other sources, and for companies whose principal business is share trading, banking, or lending.

Section 114 applies a near identical structure to losses from a “specified business” as referred to in Section 46, such losses can only be set off against profits of another specified business, and any unabsorbed amount carries forward indefinitely within that same compartment, with no separate time cap stated in this section.

Section 115 covers one further specific and narrow category: losses from owning and maintaining race horses. Such a loss can be set off only against income by way of stake money from race horses, and carries forward for a maximum of four tax years.

Depreciation is technically not a loss in the same sense as the items discussed above, but it behaves similarly when your business does not have enough profit to absorb the full depreciation claim. Section 33(11) of the Act addresses this directly. If your profits before depreciation are not enough to cover the depreciation you are otherwise entitled to, the unabsorbed portion is added to next year’s depreciation claim and treated as if it were that year’s depreciation, and this carries forward year after year with no eight year cap.

Filing Your Return on Time Is Not Optional

Section 121 contains a rule that surprises many taxpayers. No loss can be carried forward and set off under the carry forward provisions for capital loss (Section 111(1)), business loss (Section 112(1)), speculation business loss (Section 113(2)), specified business loss (Section 114(2)), or specified activity loss from owning race horses (Section 115(2)), unless that loss has been determined based on a return filed within the time limit specified in Section 263(1). In simple terms, if you file your return late, you may still have to pay tax as usual, but you lose the right to carry forward every one of these five categories of loss into future years. House property loss carry forward under Section 110 is notably not included in this list, since it is not one of the sections named in Section 121, so a house property loss can still be carried forward even from a belated return, although it is always safest to file on time to protect every loss you are entitled to.

Losses Cannot Offset Undisclosed Income Found in a Search

Section 120 closes off another route. If undisclosed income is found and added to your total income following a search under Section 247, a requisition under Section 248, or a survey under Section 253, you cannot use any brought forward loss or unabsorbed depreciation to reduce the tax on that undisclosed income. The one carve-out is a survey conducted specifically under Section 253(4), to which this restriction does not apply. Apart from that single exception, this bar applies irrespective of any other provision in the Act, meaning none of the carry forward rules discussed earlier in this article can be used as a shield against tax on undisclosed income found in this manner.

Change in Ownership Can Block a Company’s Carried Forward Loss

Section 119 adds further restrictions tied to changes in who owns or runs a business. If a partner retires or passes away during the year, the firm cannot carry forward the portion of loss proportionate to that partner’s share beyond what they were entitled to in profits for that year. If a business changes hands to a new owner other than through inheritance, only the original owner who incurred the loss can carry it forward, not the new owner. For closely held companies, if more than 49% of the voting power changes hands compared with the year the loss was incurred, the carried forward loss is blocked entirely, subject to specific exceptions for eligible start ups, genuine inheritance situations, gifts to relatives, certain group restructurings, and companies going through an approved insolvency resolution plan.

Suppose in a tax year, Rohan has a salary income of Rs 12,00,000, a loss of Rs 3,50,000 from a self-occupied house property due to home loan interest, and a loss of Rs 1,00,000 from a small consultancy business he runs on weekends. He also sold some listed shares and incurred a short-term capital loss of Rs 60,000.

This example shows why understanding which head a loss belongs to matters so much. Two of Rohan’s three losses gave him zero benefit in the current year, purely because of how the law compartmentalises different kinds of income. As long as he files his return on time, all three carried forward amounts remain available to reduce his tax in future years, within their respective eight year windows.

Disclaimer: This article is for informational and educational purposes only and is current as of June 21, 2026. All legislative information is sourced from Chapter VII (Sections 108 to 121) and Section 33(11) of the Income-tax Act, 2025. The worked example used in this article is illustrative and simplified for ease of understanding, and does not represent the facts of any actual case. This article does not constitute tax or legal advice. Readers should consult a qualified chartered accountant or tax professional and verify the current text of the Act before applying any provision discussed here to their own facts. fiscalzenith.com accepts no liability for decisions made in reliance on this article.