Set Off & Carry Forward of Losses — Income Tax Rules 2025-26 | Taxclue

Set Off & Carry Forward of Losses — Income Tax Rules (2025-26)

Updated: 3 June 2026

Quick answer: Income tax losses must be set off in a specific sequence. Intra-head set off (within the same income head) comes first — any loss from one source is set off against income from another source under the same head. Inter-head set off (across heads) is allowed for certain losses: business loss can be set off against any income except salary; house property loss can be set off against salary up to ₹2,00,000; STCG loss can be set off against LTCG or STCG; F&O loss sets off against business income. Remaining losses after set off are carried forward: most losses for 8 years (capital loss, business loss, HP loss); unabsorbed depreciation — indefinitely. Filing ITR before the due date is mandatory to carry forward losses.

₹2L House property loss can be set off against salary income up to ₹2,00,000 per year — allowed in both old and new tax regimes.

Set Off Rules — Which Loss Can Be Set Off Against Which Income

Set off follows a strict priority: intra-head first, then inter-head. The table below covers inter-head (cross-head) rules — the most commonly used and misunderstood provisions.

Loss Type	Can Set Off Against	Cannot Set Off Against	Cap / Condition
Business loss (non-speculative)	Capital gains, other sources, other business income	Salary income	No cap; ITR must be filed on time
Business loss (speculative — intraday equity)	Speculative business profit only	Everything else	Carry forward 4 years (speculative)
House property loss	Salary, capital gains, business, other sources	Nothing explicitly excluded	Max ₹2,00,000 per year in inter-head set off; excess carried forward 8 years vs HP income only
Short-term capital loss (STCL)	STCG and LTCG	Salary, business, other sources	No cap; 8-year carry forward
Long-term capital loss (LTCL)	LTCG only	STCG, salary, business, other sources	No cap; 8-year carry forward
F&O loss (non-speculative business)	Capital gains, rental income, other sources, other business	Salary income	8-year carry forward against business income
Unabsorbed depreciation	Any income except salary	Salary income	Carry forward unlimited years

Carry Forward Periods for Different Losses

When a loss cannot be fully set off in the current year, it is carried forward to subsequent years. The carry forward period and conditions vary by loss type:

Loss Type	Carry Forward Period	Set Off Allowed Against (in future years)	ITR Filing Deadline Required?
Non-speculative business loss	8 assessment years	Business income only (after carry forward)	Yes — must file by due date
Speculative business loss	4 assessment years	Speculative business income only	Yes — must file by due date
House property loss (excess over ₹2L)	8 assessment years	Income from house property only	No — can carry forward even in belated return
Short-term capital loss	8 assessment years	STCG and LTCG	Yes — must file by due date
Long-term capital loss	8 assessment years	LTCG only	Yes — must file by due date
Unabsorbed depreciation	Unlimited (indefinite)	Any income except salary	No restriction on filing

Key Rules to Remember

Order of set off: (1) Intra-head set off first. (2) Inter-head set off next. (3) Carry forward the remaining loss. This order is mandatory — you cannot skip intra-head and directly carry forward.

New tax regime: House property loss of up to ₹2L can still be set off against salary in the new regime. However, losses from other heads cannot reduce income in the new regime if the source is exempt or restricted (e.g., long-term equity capital gains taxed at special rates).

Mandatory ITR filing: To carry forward any loss (except HP loss and unabsorbed depreciation), the ITR must be filed on or before the due date (July 31 for non-audit; October 31 for audit cases). Belated filing forfeits the carry forward right for capital and business losses.

Frequently Asked Questions

Can I set off business loss against salary income?

No. Business loss (non-speculative) cannot be set off against salary income. It can be set off against any other income head except salary — such as income from other business, capital gains, or other sources. However, business loss from a speculative business (e.g., intraday equity) can only be set off against profit from another speculative business. After intra-year set off, remaining business loss can be carried forward for 8 years.

What is the house property loss set off limit against salary?

Loss from house property (interest on home loan exceeding rental income) can be set off against salary or other income up to a maximum of ₹2,00,000 per year. This ₹2L cap applies under both the old and new tax regimes. Any unabsorbed house property loss beyond ₹2L is carried forward and can be set off against house property income only in the subsequent 8 assessment years.

How long can capital gains losses be carried forward?

Capital loss (both long-term and short-term) can be carried forward for 8 assessment years. LTCL (long-term capital loss) can only be set off against LTCG. STCL (short-term capital loss) can be set off against both STCG and LTCG. Important: to carry forward capital loss, you must file your ITR before the due date. Capital loss carried forward cannot be set off against salary, business income, or other income.

What are the F&O loss set off rules?

F&O (Futures & Options) trading is treated as non-speculative business income/loss. F&O loss can be set off against any income except salary — including income from other business, rental income, capital gains, or other sources. After set off, unabsorbed F&O loss is carried forward for 8 years and set off against business income. F&O loss cannot be set off against salary. Filing ITR-3 before the due date is mandatory to carry forward F&O losses.

Is ITR filing mandatory to carry forward losses?

Yes. Filing your ITR on or before the due date (usually July 31 for non-audit cases) is mandatory to carry forward any loss — business loss, capital loss, or speculative loss. If you file a belated return (after due date), you lose the right to carry forward losses — except for unabsorbed depreciation and house property loss, which can be carried forward even in belated returns.

Income Tax Loss Set Off Near You

Expert CA/CS assistance for income tax loss set off across India. Click your city for local details.

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