Key Highlights
- Loss set-off rules under Chapter VII, Sections 108–120, ITA 2025
- Two levels of set-off: Intra-head (within same head) and Inter-head (across different heads)
- House property loss: set off against any head, up to ₹2 lakh per year; excess carried for 8 years
- Business loss (non-speculative): set off against all heads except salary; carried for 8 years
- Speculative business loss: only set off against speculative income; carried for 4 years only
- Capital loss: LTCL vs LTCG only; STCL vs STCG or LTCG; carried for 8 years
- Filing ITR before due date is mandatory to carry forward losses
1. Overview
When you incur a loss in any income head, the tax system allows you to use that loss to reduce your tax burden — either in the same year (by setting it off against other income) or in future years (by carrying it forward). These rules prevent unfair taxation where a taxpayer who earned ₹10 lakh and lost ₹5 lakh in another venture is taxed as if they earned ₹10 lakh.
Chapter VII of the Income Tax Act, 2025 contains all set-off and carry-forward rules under Sections 108 to 120. There are two levels of loss set-off: first, intra-head set-off (losses within the same head), and then inter-head set-off (losses from one head against income from another head).
2. Level 1: Intra-Head Set-Off (Section 108)
Before doing inter-head set-off, losses within the same head are first set off against income within the same head:
- Loss from one business can be set off against income from another business under PGBP
- Loss from one house property can be set off against income from another house property
- STCL from one asset can be set off against STCG or LTCG from another asset
- LTCL from one asset can be set off against LTCG from another asset
3. Level 2: Inter-Head Set-Off (Section 109)
After intra-head set-off, the remaining loss can be set off against income from other heads, subject to restrictions:
| Loss From | Can Set Off Against | Cannot Set Off Against |
|---|---|---|
| House Property Loss | Any other head — but capped at ₹2 lakh per year | Excess beyond ₹2L cannot be set off inter-head |
| Non-Speculative Business Loss | All heads except Salary | Salary income |
| Speculative Business Loss | Speculative business income only | All other heads |
| Capital Loss (STCL) | STCG and LTCG | Salary, business, house property, other sources |
| Capital Loss (LTCL) | LTCG only | STCG and all other heads |
| Loss from Other Sources | Cannot be set off inter-head (except owning/maintaining race horses) | All heads |
4. Carry Forward of Losses
| Type of Loss | Carry Forward Period | Can Set Off Against in Future Years | ITR Due Date Filing Required? |
|---|---|---|---|
| House Property Loss (beyond ₹2L inter-head limit) | 8 Tax Years | House property income only | Yes |
| Non-Speculative Business Loss | 8 Tax Years | Business income (PGBP) only | Yes |
| Speculative Business Loss | 4 Tax Years | Speculative business income only | Yes |
| Short-Term Capital Loss | 8 Tax Years | STCG and LTCG | Yes |
| Long-Term Capital Loss | 8 Tax Years | LTCG only | Yes |
| Unabsorbed Depreciation | Indefinitely (no time limit) | Any income (any head) | No specific requirement |
5. Unabsorbed Depreciation: The Unlimited Carry-Forward
When a business has a loss entirely due to depreciation (i.e., the business income is less than the depreciation allowance), the excess depreciation is called "unabsorbed depreciation." Unlike business losses, unabsorbed depreciation can be:
- Carried forward indefinitely — no 8-year limit
- Set off against income from any head in future years (not just business income)
- Even set off against salary income (unlike business losses)
6. Loss from Owning Racehorses
The one exception to the "other sources loss cannot be set off" rule: losses incurred in the business of owning and maintaining racehorses (Section 94/Section 116 of ITA 2025) can be carried forward for 4 years and set off only against income from the same activity — not against any other income.
7. VDA (Cryptocurrency) Losses: Special Rule
Under Sections 102–106 of ITA 2025, losses from Virtual Digital Asset (cryptocurrency/NFT) transfers:
- Cannot be set off against any other income — not even other VDA income
- Cannot be carried forward to future Tax Years
- Are permanently lost for tax purposes
This is the harshest loss treatment in the Income Tax Act — VDA losses are a complete dead end.
8. Set-Off Examples
All examples below are illustrative only.
Example 1: Rahul has salary of ₹12L, house property loss of ₹3L, and STCG of ₹2L in Tax Year 2026-27.
- House property loss vs salary: set off ₹2L (maximum allowed); ₹1L HP loss carried forward for 8 years
- STCG of ₹2L taxed at 20% (equity) = ₹40,000
- Salary taxable after HP set-off: ₹12L − ₹2L = ₹10L (new regime: no HP deduction actually; HP loss set-off applies to taxable income)
Example 2: Meera has LTCL of ₹80,000 from property and LTCG of ₹3L from equity in Tax Year 2026-27.
- Set off LTCL (₹80,000) vs LTCG (₹3L): remaining LTCG = ₹2.2L
- Less: ₹1.25L exemption on equity LTCG = ₹95,000 taxable LTCG
- Tax on ₹95,000 at 12.5% = ₹11,875
9. Latest Updates Under ITA 2025
- Set-off provisions reorganised under Chapter VII (Sections 108–120); previously Chapter VI (Sections 70–80) of ITA 1961
- VDA loss rules under Sections 102–106 — no set-off, no carry-forward
- All other set-off provisions substantively unchanged
10. Why TaxClue
Optimal loss set-off requires careful sequencing — intra-head first, then inter-head, then carry-forward decisions. Getting it wrong means paying more tax than necessary. TaxClue's tax advisors ensure your losses are set off in the most tax-efficient manner and your carry-forward rights are preserved. Contact us for ITR filing and loss optimisation.
11. Resources & Checklist
- ☐ Identify all losses across all heads for the Tax Year
- ☐ First apply intra-head set-off (within same head)
- ☐ Then apply inter-head set-off (check restrictions above)
- ☐ Document carry-forward losses in ITR Schedule CYLA/BFLA
- ☐ File ITR before due date to preserve carry-forward rights
- ☐ Track carry-forward losses year by year for 8 years
12. Contact Us
Every loss in your portfolio has tax value — if you know how to use it. TaxClue maximises your loss set-off and ensures carry-forward rights are preserved through timely, accurate ITR filing. Contact us today.