Section 109 of the Income-tax Act, 2025 allows a loss under one head to be set off against income under another head, subject to three restrictions: business loss cannot meet salary, house property loss is capped at ₹2,00,000, and capital loss cannot meet any other head.
What section 109 does
Section 109 is the inter-head set off provision — the successor to section 71 of the Income-tax Act, 1961. It comes into play only after section 108 has netted losses within each head.
The general rule is permissive: a loss under any head other than Capital gains may be set off against income under any other head, including Capital gains. But three restrictions do most of the work in practice.
Those restrictions are: a business loss cannot be set off against salary; a house property loss can be set off only to the extent of ₹2,00,000 against income under any other head; and a capital gains loss cannot be set off against any other head at all.
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 |
|---|---|---|
| 71(1) and (2) | Inter-head set off | 109(1) |
| 71(2A) | Business loss not against salary | 109(1)(a) |
| 71(3A) | House property loss capped at ₹2,00,000 | 109(1)(b) |
| 71(3) | Capital loss not against other heads | 109(2) |
| 70 | Intra-head set off | 108 |
| 71B | Carry forward of house property loss | 110 |
Section 109 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 permission
Subject to the provisions of Chapter VII, for any tax year, if income computed under any head other than Capital gains is a loss, it shall be set off against income under any other head, including Capital gains, assessable for that tax year — subject to the two conditions in clauses (a) and (b).
Clause (1)(a) — business loss cannot meet salary
A loss under the head Profits and gains of business or profession shall not be set off against income assessable under the head Salaries. A salaried person with a side business making losses cannot reduce their salary income with it — the loss is carried forward under section 112 instead.
Clause (1)(b) — the ₹2,00,000 house property cap
A loss under the head Income from house property shall be set off to the extent of ₹2,00,000 against income under any other head. This is the provision that limits how much home loan interest can shelter salary income in a year. What exceeds ₹2,00,000 is not lost — it is carried forward under section 110 for up to eight years, but only against house property income.
Sub-section (2) — capital loss stays within its head
For any tax year, the loss under the head Capital gains shall not be set off against income under any other head. Capital losses are confined to capital gains, both in the year of the loss under section 108 and on carry forward under section 111.
The order of operations
Apply section 108 first, within each head. Then apply section 109 across heads, respecting the three restrictions. Anything left goes to the carry forward sections — 110 for house property, 111 for capital gains, 112 for business — all subject to section 121.
Worked example
A salaried individual with a home loan and a small consulting practice, tax year 2026-27.
| Head | Amount | Set off under section 109 |
|---|---|---|
| Salary | ₹22,00,000 | — |
| House property loss (self-occupied, interest ₹4,80,000 capped at ₹2,00,000 by section 22) | Loss ₹2,00,000 | Set off in full — exactly at the clause (1)(b) limit |
| Consulting business | Loss ₹3,50,000 | Cannot be set off against salary — clause (1)(a); carried forward under section 112 |
| Long-term capital loss on shares | Loss ₹1,10,000 | Cannot be set off against any other head — sub-section (2); carried forward under section 111 |
| Total income | ₹20,00,000 |
Of ₹6,60,000 of losses, only ₹2,00,000 reduces this year's income. The ₹3,50,000 business loss and ₹1,10,000 capital loss are carried forward — but only if the return is filed by the section 263(1) due date, as section 121 requires.
Had the house property loss been ₹3,20,000, only ₹2,00,000 would have been set off and ₹1,20,000 carried forward under section 110, usable only against future house property income.
Compliance checklist and due dates
- Complete the intra-head set off under section 108 before applying section 109.
- Cap the house property set off at ₹2,00,000 and carry the balance forward under section 110.
- Do not attempt to set a business loss against salary — clause (1)(a) bars it.
- Keep capital losses within the capital gains head; sub-section (2) is absolute.
- File by the section 263(1) due date so the unabsorbed losses survive under section 121.
- Note that unabsorbed depreciation follows section 33(11), not the Chapter VII carry forward rules.
Common mistakes
- Setting the full house property loss against salary. The cap is ₹2,00,000.
- Assuming a business loss can reduce salary income.
- Trying to set a capital loss against business or salary income.
- Filing late and losing the carry forward of the unabsorbed portion.
- Confusing the ₹2,00,000 interest cap in section 22(2) with the ₹2,00,000 set off cap here — they are different provisions that can both apply.
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.