Last reviewed: 24 September 2026. A loss in one head of income does not automatically wipe out tax on another – the set-off rules are specific about what can offset what, and the carry-forward rules are unforgiving about deadlines. The single most expensive mistake we see is a business or capital loss that becomes permanently unusable because the return was filed a day past the due date.
The set-off hierarchy
| Step | Rule |
|---|---|
| 1. Intra-head set-off (Section 70) | Loss from one source is first set off against income from another source under the same head – e.g., a loss-making shop against a profitable shop, both under "profits and gains of business" |
| 2. Inter-head set-off (Section 71) | Remaining loss under a head is set off against income under other heads, subject to restrictions below |
| 3. Carry forward | Whatever cannot be set off in the current year carries forward to future years, against income of the same head only (with narrower matching rules than the current year's set-off) |
The restrictions that actually matter
- Speculation business loss: can only be set off against speculation business income, both in the current year and on carry-forward – never against non-speculative business income or any other head.
- Long-term capital loss: can only be set off against long-term capital gains – not short-term gains, and not any other head. Short-term capital loss is more flexible: it can be set off against both short-term and long-term capital gains.
- House property loss: can be set off against income from any other head, but capped at ₹2 lakh in a single year since FY 2017-18; any excess loss beyond that cap carries forward (against house property income only in future years) rather than being set off immediately elsewhere.
- Non-speculative business loss: can be set off against income from any head except salary.
- Capital loss (short or long-term): cannot be set off against any other head at all, only within the capital gains head itself, following the LTCL/STCL matching rules above.
Worked example. A taxpayer has salary income of ₹18 lakh, a non-speculative business loss of ₹5 lakh, a house property loss of ₹3 lakh (interest on a home loan), and a long-term capital loss of ₹2 lakh from equity shares. The business loss (₹5 lakh) sets off against salary-adjacent heads except salary itself – but since there is no other head with positive income here besides salary, and business loss cannot touch salary, it carries forward in full. The house property loss sets off up to ₹2 lakh against salary income (the cap), with the remaining ₹1 lakh carried forward. The long-term capital loss cannot touch salary or any other head at all – it carries forward in full, available only against future long-term capital gains.
The deadline that decides whether carry-forward is even available
Section 80 makes the carry-forward of business loss, speculation loss and capital loss conditional on filing the return within the due date under Section 139(1). Miss the due date – even file one day late as a belated return – and these specific losses cannot be carried forward at all, regardless of how well-documented they are. This is one of the harshest, least-forgiving provisions in the Act because there is no discretion or condonation route for a simple late filing.
Two carve-outs survive a belated return: house property loss and unabsorbed depreciation can still be carried forward even if the return is filed late. Everything else – business loss, speculation loss, capital loss – needs a return filed on time, full stop.
How long can a loss be carried forward?
| Loss type | Carry-forward period |
|---|---|
| Non-speculative business loss | 8 assessment years |
| Speculation business loss | 4 assessment years |
| Capital loss (short or long-term) | 8 assessment years |
| House property loss | 8 assessment years |
| Unabsorbed depreciation | No time limit – carries forward indefinitely |
Practical checklist
- File the return by the due date whenever a business, speculation or capital loss needs to be preserved for future years – treat this as non-negotiable, not a "file when convenient" item.
- Track carried-forward losses year over year in your own records, not just relying on the department's system, since discrepancies do occur and are easier to fix promptly than years later.
- When computing old vs new regime, remember that several loss set-offs (notably house property loss against other income) are unavailable or restricted under the new regime – factor this into the regime comparison, not just the headline rates.
- Match long-term capital losses against long-term gains deliberately at year-end if you have flexibility on when to realise gains – timing a gain to use up an expiring loss can be worth planning for.
- Review your capital gains computation for shares and mutual funds alongside any carried-forward capital losses before finalising your return – the two feed directly into each other.
Frequently asked questions
Can I set off my house property loss fully against my salary income?
Only up to Rs 2 lakh in a financial year. Any house property loss beyond that cap must be carried forward and can only be set off against house property income in future years, not against salary or other heads.
I filed my return a week after the due date. Can I still carry forward my business loss?
No. Carry-forward of business loss, speculation loss and capital loss requires the return to be filed within the due date under Section 139(1). A belated return forfeits the right to carry these specific losses forward, even though the loss itself is real and documented.
Does the new tax regime allow the same loss set-offs as the old regime?
Not entirely. Several set-offs, including house property loss against other heads, are restricted or unavailable under the new regime. This is an important factor when comparing regimes, beyond just the headline tax rates.
Can a short-term capital loss be set off against a long-term capital gain?
Yes. Short-term capital loss can be set off against both short-term and long-term capital gains. Long-term capital loss, however, can only be set off against long-term capital gains, not short-term gains.
What happens to unabsorbed depreciation if my business loss carry-forward period expires?
They are tracked separately. Unabsorbed depreciation under Section 32(2) has no time limit for carry-forward, unlike business loss which expires after 8 assessment years, so a business can still carry forward unabsorbed depreciation indefinitely even after the loss carry-forward window closes.
Can I choose which loss to set off first if I have multiple types in the same year?
The Act prescribes the sequence (intra-head first, then inter-head, following the specific restrictions for each loss type) rather than leaving it to taxpayer choice, though within those rules there can be some flexibility in how losses are matched against multiple income sources.
We handle return filing, loss computation and carry-forward tracking across years.
Income Tax Filing Virtual CFO Services Talk to usThis article summarises the set-off and carry-forward provisions as understood on the date of review. General information, not advice on your specific facts – confirm details against the current forms/portal and consult us or your tax advisor before acting. CA Somesh Chandak & Associates, FRN 158694W.