Section 108 of the Income-tax Act, 2025 allows a loss from any source under a head other than Capital gains to be set off against income from another source under the same head. Short-term capital loss may meet any capital gains, but long-term capital loss only long-term gains.
What section 108 does
Section 108 is the first step in the loss hierarchy — the successor to section 70 of the Income-tax Act, 1961. It deals with intra-head set off: losses from one source meeting income from another source under the same head.
For every head other than Capital gains, the rule is simple. If the net result from any source is a loss, it is set off against income from any other source under the same head in that tax year — a loss from one business against profit from another, a loss from one let property against income from another.
Capital gains are treated separately in sub-section (2), and the asymmetry there is the point most taxpayers need. A short-term capital loss may be set off against income from any other capital asset, short-term or long-term. A long-term capital loss may only be set off against income from another long-term capital asset.
The Income-tax Act, 2025 takes effect from 1 April 2026 and applies from tax year 2026-27. The Income-tax Act, 1961 continues to govern every year up to 31 March 2026, including assessments, appeals and penalties for those years, because of the repeal and savings provision in section 536. Figures quoted here are the amounts written into the Act as enacted (with the Gazette corrigenda of 3 September 2025); the annual Finance Act can change rates and thresholds.
Old Act and new Act, side by side
The table below shows what the Income-tax Act, 1961 did and where the same ground is covered in the Income-tax Act, 2025.
| Income-tax Act, 1961 | What it did | Income-tax Act, 2025 |
|---|---|---|
| 70(1) | Intra-head set off for heads other than capital gains | 108(1) |
| 70(2) | Short-term capital loss against any capital gains | 108(2)(a) |
| 70(3) | Long-term capital loss only against long-term gains | 108(2)(b) |
| 71 | Inter-head set off | 109 |
| 74 | Carry forward of capital loss | 111 |
Section 108 sub-section by sub-section
Read this alongside the bare text — each heading below is a sub-section of the section as enacted.
Sub-section (1) — the general intra-head rule
Unless provided otherwise in the Act, for any tax year, if the net result of computation from any source under any head of income (other than Capital gains) is a loss, the assessee is entitled to set it off against income from any other source under the same head for that tax year. This is why two businesses run by the same person are netted before anything else happens.
Sub-section (2)(a) — short-term capital loss is flexible
Where the computation under sections 72 to 90 in respect of any short-term capital asset is a loss, it is set off against the income computed in respect of any other capital asset for that year. Short-term losses can therefore absorb long-term gains — a useful planning point given the 12.5% long-term rate under sections 197 and 198.
Sub-section (2)(b) — long-term capital loss is restricted
Where the computation in respect of any long-term capital asset is a loss, it is set off only against the income computed in respect of any other long-term capital asset. A long-term loss cannot reduce short-term gains taxed at 20% under section 196.
Where section 108 sits in the sequence
The order is fixed: section 108 nets losses within a head; section 109 then sets the remaining loss against other heads, subject to its own restrictions; and what still survives is carried forward under sections 110 to 120, provided the return condition in section 121 is met.
Worked example
An individual has the following in tax year 2026-27.
| Source | Result | Set off under section 108 |
|---|---|---|
| Business A | Profit ₹12,00,000 | — |
| Business B | Loss ₹4,00,000 | Set off against Business A under sub-section (1) — net business income ₹8,00,000 |
| Let property 1 | Income ₹3,00,000 | — |
| Let property 2 | Loss ₹1,20,000 | Set off against property 1 under sub-section (1) — net ₹1,80,000 |
| Short-term capital loss on shares | Loss ₹5,00,000 | May be set off against any capital gains — sub-section (2)(a) |
| Long-term capital gain on property | Gain ₹6,00,000 | Absorbs the short-term loss |
| Long-term capital loss on gold | Loss ₹2,00,000 | Only against long-term gains — sub-section (2)(b) |
Net capital gains work out to ₹6,00,000 − ₹5,00,000 − ₹2,00,000, giving a remaining long-term capital loss of ₹1,00,000. Had the ₹6,00,000 gain been short-term instead, the ₹2,00,000 long-term loss could not have touched it, and it would have been carried forward under section 111 instead.
Compliance checklist and due dates
- Net all sources within a head before attempting any inter-head set off under section 109.
- Use short-term capital losses against long-term gains where possible — sub-section (2)(a) permits it and the long-term rate is lower.
- Never set a long-term capital loss against short-term gains; sub-section (2)(b) restricts it.
- Remember speculation and specified business losses have their own regimes in sections 113 and 114.
- File the return by the section 263(1) due date to preserve any loss that has to be carried forward — section 121.
Common mistakes
- Setting a long-term capital loss against short-term capital gains.
- Attempting an inter-head set off before completing the intra-head set off.
- Treating a speculation business loss as an ordinary business loss for set off; section 113 governs it.
- Assuming losses survive automatically. Carry forward depends on section 121 and a timely return.
This is an explanatory guide, not tax advice, and it does not reproduce the section in full. Read the bare text of the section before you rely on it, and check for later amendments, the Income-tax Rules made under the new Act, and CBDT circulars and notifications.