Set-Off and Carry Forward of Losses Under Income Tax: A Complete Guide
Not every year produces a profit — and the Income Tax Act recognises this by allowing losses to be set off against gains, either in the same year or in future years. But the rules differ sharply depending on the type of loss, and missing a deadline can mean losing the benefit permanently.
Two Stages: Set-Off and Carry Forward
"Set-off" means adjusting a loss from one source against income from another in the same financial year. "Carry forward" means a loss that could not be fully set off in the current year is carried to future years, where it can be set off against eligible income, subject to time limits.
Intra-Head Set-Off
This means setting off a loss from one source against income from another source under the same head. For example, a loss from one house property can be set off against income from another house property, or a loss from one business can be set off against profit from another business — generally with few restrictions, though there are exceptions (e.g., loss from speculative business can only be set off against speculative business profit).
Inter-Head Set-Off
This means setting off a loss under one head against income under a different head. Key rules:
- House property loss can be set off against income from any other head (including salary), but capped at ₹2 lakh per year.
- Business loss (non-speculative) can be set off against income from any head except salary.
- Capital losses cannot be set off against income from any other head — they can only be set off against capital gains (and even then, with restrictions between short-term and long-term).
- Loss from speculative business or owning/maintaining race horses cannot be set off against any other head's income at all.
Capital Loss Rules — Short-Term vs Long-Term
Capital losses get special treatment:
- Short-term capital loss (STCL) can be set off against both short-term capital gains (STCG) and long-term capital gains (LTCG).
- Long-term capital loss (LTCL) can be set off only against long-term capital gains — not against short-term gains.
- Unutilised capital losses can be carried forward for 8 assessment years, retaining the same short-term/long-term character.
Time Limits for Carry Forward (Summary Table)
| Type of Loss | Carry Forward Period | Can Be Set Off Against |
|---|---|---|
| House property loss | 8 years | Income from house property only |
| Business loss (non-speculative) | 8 years | Profits and gains of business/profession |
| Speculative business loss | 4 years | Speculative business profit only |
| Short-term capital loss | 8 years | STCG and LTCG |
| Long-term capital loss | 8 years | LTCG only |
| Loss from owning race horses | 4 years | Income from owning race horses only |
Order of Set-Off Matters
Within a year, current-year losses must first be set off (intra-head and then inter-head) before brought-forward losses from earlier years are applied. Getting this order wrong in your ITR can lead to incorrect carry-forward figures being recorded, which can cause issues in later years when you try to claim the brought-forward loss.
New Tax Regime Considerations
Brought-forward losses related to deductions/exemptions that are not available under the new tax regime (such as a house property loss arising purely from Section 24(b) interest on a self-occupied property) may not be available for set-off if you switch to the new regime in a later year. It's worth reviewing your carried-forward loss position before deciding which regime to opt for.