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Set-Off and Carry Forward of Losses — Income Tax Act 2025
Updated: 3 June 2026 | Income-tax Act, 2025 | Tax Year 2026-27
Under the Income-tax Act, 2025, losses can be set off against income in the same year and, if still unabsorbed, carried forward to future years. Business losses carry forward for 8 years (only against business income); capital losses carry forward 8 years (LTCL only against LTCG; STCL against STCG or LTCG); speculative losses 4 years (only against speculative profit); unabsorbed depreciation — unlimited years against any head. ITR must be filed before the due date to preserve the right to carry forward (exception: unabsorbed depreciation).
8 Yrs
Maximum carry-forward period for most losses — unabsorbed depreciation: unlimited Speculative loss: 4 years only. ITR filing by due date is mandatory to carry forward (except unabsorbed depreciation).
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Late ITR filing kills your carry-forward right. If you file a belated return (after the due date), you lose the right to carry forward capital losses, business losses, and speculative losses incurred in that year. Only unabsorbed depreciation survives belated filing. File on time if you have any losses to carry forward.
Two-Step Loss Utilisation: Set-Off First, Then Carry Forward
Step 1 — Intra-head set-off: First, losses within the same income head are adjusted. Example: loss from one house property set off against income from another house property; STCL from one share trade set off against STCG from another.
Step 2 — Inter-head set-off: After intra-head set-off, the remaining loss can be set off against other income heads (with restrictions). For example, house property loss (up to ₹2 lakh) can be set off against salary. Business loss can be set off against any head except salary, in the same year.
Step 3 — Carry forward: If the loss is still unabsorbed after both set-off steps, it is carried forward to future assessment years as per the type-specific rules below.
Loss Set-Off and Carry Forward — Complete Reference Table
Loss Type
Can Set Off Against (Same Year)
Carry Forward Period
Future Set-Off Restricted To
ITR by Due Date?
Short-Term Capital Loss (STCL)
STCG and LTCG (any asset)
8 years
STCG and LTCG only
Mandatory
Long-Term Capital Loss (LTCL)
LTCG only
8 years
LTCG only
Mandatory
Business Loss (non-speculative)
Any head except salary (same year)
8 years
PGBP income only (future years)
Mandatory
Speculative Business Loss
Speculative profit only (same year)
4 years
Speculative profit only
Mandatory
F&O Loss (non-speculative business)
Any head except salary (same year)
8 years
PGBP income only (future years)
Mandatory
House Property Loss
Any other head; max ₹2L vs salary/other
8 years
House Property income only (future years)
Mandatory
Unabsorbed Depreciation
Any head (same year)
Unlimited
Any head (future years)
Not mandatory
Loss from Specified Business (35AD)
Specified Business income only
Unlimited
Specified Business income only
Mandatory
Capital Losses — Set-Off Quick Reference
Capital Loss
Set Off vs STCG?
Set Off vs LTCG?
Set Off vs Salary?
Carry Forward
Short-Term Capital Loss (STCL)
Yes
Yes
No
8 years
Long-Term Capital Loss (LTCL)
No
Yes
No
8 years
F&O Trading — Non-Speculative Business Loss
Futures and Options (F&O) trading income/loss is classified as non-speculative business income under the Income-tax Act, 2025. This is a key distinction from intraday equity trading (which is speculative). F&O losses can be set off in the same year against any income except salary (rental income, interest, capital gains, other business income — all allowed). They can be carried forward for 8 years, but in subsequent years set off is restricted to PGBP income only. Since F&O is business income, ITR-3 must be filed. A tax audit under Section 44AB may be required depending on turnover and profit/loss criteria.
Unabsorbed Depreciation — The Unlimited Carry-Forward
Unabsorbed depreciation arises when a business's total depreciation claim exceeds its business income in a given year. Unlike all other losses, it has two unique features: (1) it can be set off against any head of income — including salary, house property, capital gains, and other sources; (2) it carries forward for unlimited years with no expiry. Additionally, it is the only loss that can be carried forward even if the ITR is filed after the due date (belated return). This makes it the most flexible and durable tax benefit available to capital-intensive businesses.
Frequently Asked Questions
Can a capital loss be set off against salary income?
No. Capital losses (both Short-Term Capital Loss and Long-Term Capital Loss) cannot be set off against salary income or any other non-capital gain income head. This is because capital gains is an independent head under the Income-tax Act, 2025, and capital losses are restricted to intra-head set-off only (against capital gains). STCL can set off against both STCG and LTCG. LTCL can set off only against LTCG. Neither can be used to reduce taxable salary, rental income, or business income.
How do I report carry forward of capital losses in my ITR?
Capital losses are reported in Schedule CG (Capital Gains) of the relevant ITR form — ITR-2 or ITR-3. Within Schedule CG, you report the individual sale transactions, compute gain or loss, and the schedule automatically computes eligible set-off and the balance to be carried forward. The carried forward loss figure flows into Schedule BFLA (Brought Forward Loss Adjustment) in subsequent years. Schedule CFL (Current Year Losses) captures losses from the current year. To carry forward capital losses, the ITR must be filed on or before the due date under the Income-tax Act, 2025. Late filing forfeits the right to carry forward capital losses.
What happens if I file my ITR after the due date — can I still carry forward losses?
No, generally. Filing the ITR after the due date (belated return) results in loss of the right to carry forward most losses — including capital losses, business losses, and speculative losses. The key exception is unabsorbed depreciation, which can be carried forward even if the return is filed belatedly. However, if you have losses that were carried forward from previous years (brought forward losses), you can still set them off in the current year even if the current year return is belated — the right to carry forward only applies to current year losses. This makes timely ITR filing critical for taxpayers with capital market activity or business losses.
How is Long-Term Capital Loss from equity shares or equity mutual funds treated?
Long-Term Capital Loss (LTCL) from listed equity shares, equity-oriented mutual funds, or units of business trusts (where STT was paid at the time of acquisition and sale, and holding period exceeds 12 months) can be set off against Long-Term Capital Gains (LTCG) from any asset. After set-off, if LTCL exceeds LTCG in the current year, the balance LTCL can be carried forward for up to 8 assessment years to be set off against future LTCG. The LTCL from equity cannot be set off against STCG. Note: prior to FY 2018-19, LTCG from equity was fully exempt — so no LTCL was possible before that year.
Can unabsorbed depreciation be carried forward forever?
Yes. Unabsorbed depreciation (depreciation that could not be fully absorbed against business income in a given year) is unique — it can be carried forward for an unlimited number of years under the Income-tax Act, 2025. It can also be set off against income from any head (not just business income), unlike ordinary business losses which can only be set off against future business income. Additionally, unabsorbed depreciation can be carried forward even if the ITR is filed belatedly — it is the only loss type with this privilege. This makes it a powerful tax planning tool for capital-intensive businesses or companies in early losses.
Our experts handle ITR-2 and ITR-3 filing with complete Schedule CG and BFLA entries — ensuring all your carried-forward losses are correctly reported and utilised.
