When income under one head is negative (a loss), the Income Tax Act 2025 allows the taxpayer to reduce that loss against positive income under other heads (inter-head set-off) or against income under the same head in the same or future years (carry forward). This guide explains the complete framework.
Step 1: Intra-Head Set-Off
Losses from one source under a head of income are first set off against positive income from another source within the same head. Example: Loss from one house property vs income from another house property in the same Tax Year.
Step 2: Inter-Head Set-Off (Same Year)
| Loss From | Can Set Off Against | Cannot Set Off Against |
|---|---|---|
| House Property | Any other head (max Rs. 2L) | Excess above Rs. 2L cannot be set off |
| Business/Profession (non-speculative) | Any other head except salary | Salary income |
| Speculative Business | Speculative Business only | All other heads |
| STCL | STCG, LTCG | Salary, business, HP |
| LTCL | LTCG only | STCG, all other heads |
| VDA Loss | Nothing | Cannot be set off anywhere |
Step 3: Carry Forward to Future Tax Years
| Loss Type | Carry Forward Period | Set Off Against |
|---|---|---|
| House Property Loss | 8 Tax Years | House property income only |
| Business Loss (non-speculative) | 8 Tax Years | Business income only |
| Speculative Business Loss | 4 Tax Years | Speculative profit only |
| STCL | 8 Tax Years | STCG or LTCG |
| LTCL | 8 Tax Years | LTCG only |
| Unabsorbed Depreciation | Indefinite | Any income |
| VDA Loss | Cannot carry forward | N/A |
Mandatory Return Filing to Carry Forward
A loss can be carried forward only if the ITR is filed by the due date (31 July for non-audit). If ITR is filed late (belated return), the right to carry forward most losses is lost. Exception: unabsorbed depreciation and house property losses can still be carried forward even with belated returns.
Important Conditions
- Continuity of business: Business loss carry forward requires 51% ownership continuity in companies (shareholder continuity test)
- Brought-forward losses are set off before current year losses in the same head
- Partner's share of firm loss can be carried forward by the partner personally
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