Set-off & Carry Forward of Losses (Sections 108–121)
Set-off & Carry Forward of Losses
Complete guide to how losses are set off and carried forward under the Income Tax Act 2025 — intra-head, inter-head, head-specific rules, time limits, restrictions on companies changing hands, undisclosed income bar, and treatment of losses in corporate restructuring.
🔄 Replaces: Sections 70–80 of the Income Tax Act 1961
📅 Effective: 1st April 2026 (Tax Year 2026-27 onwards)
The Two-Step Set-off Framework
Loss set-off works in two mandatory steps — first intra-head (within the same income head), then inter-head (across different heads). Only what cannot be absorbed in both steps is carried forward.
Set loss from one source against income from another source under the same head. Done first, within each head, before any inter-head set-off.
Example: Loss from one house property against income from another house property.
After intra-head set-off, any remaining loss under one head is set off against income under a different head. Subject to specific restrictions.
Example: House property loss (up to ₹2L) against salary income.
Section 108 — Intra-Head Set-off (Same Head)
Replaces Section 70 of the 1961 Act. If the net result from any source under a head is a loss, set it off against income from any other source under the same head in the same year.
| Head | Intra-Head Set-off Rule |
|---|---|
| All heads except Capital Gains [108(1)] | Loss from any source under a head is freely set off against income from any other source under the same head. No restrictions within the head (except speculation, specified business, specified activity which have their own sections). |
| Capital Gains — STCL [108(2)(a)] | Short-term capital loss set off against income from any capital asset (both STCG and LTCG) in the same year. |
| Capital Gains — LTCL [108(2)(b)] | Long-term capital loss set off only against LTCG — cannot set off LTCL against STCG. |
Section 109 — Inter-Head Set-off (Different Heads)
Replaces Section 71 of the 1961 Act. After intra-head set-off, remaining loss under one head can be set off against income under another head in the same year, subject to restrictions.
| Loss Head | Can Set Off Against | Cannot Set Off Against |
|---|---|---|
| House Property Loss [109(1)(b)] | Any other head (salary, business, IFOS, capital gains) — but capped at ₹2,00,000 per year | No restriction on head — only the ₹2L cap limits it |
| Business / Profession Loss [109(1)(a)] | Any other head — house property, capital gains, IFOS | Salaries — business loss cannot be set off against salary income |
| Capital Gains Loss [109(2)] | — | No other head — capital loss can only be set off within capital gains (intra-head only) |
| IFOS / Other Loss | Any other head freely | No restrictions |
Sections 110–115 — Carry Forward Rules by Type of Loss
The portion of house property loss not absorbed under Section 109 (i.e., the amount over and above the ₹2L inter-head cap, or if no income available) is carried forward.
- Carried forward loss can be set off only against house property income in subsequent years — not against any other head
- Maximum carry forward: 8 years from the year the loss was first computed
| Loss Type | Can Set Off Against | Carry Forward Period |
|---|---|---|
| STCL (carried fwd) | Any capital gains — both STCG and LTCG in future years | 8 years |
| LTCL (carried fwd) | Only LTCG in future years — not against STCG | 8 years |
- Carried forward loss set off against any business or profession income (not restricted to same business)
- Maximum carry forward: 8 years
- Priority rule [Section 112(3)]: Effect must first be given to Section 112 (business loss) before unabsorbed depreciation under Section 33(11). Business loss is used up first; unabsorbed depreciation is the last resort — and has no time limit
- Speculation loss can be set off only against speculation business profits — in the same year (intra-head) or carried forward
- Cannot set off speculation loss against non-speculation business income or any other head
- Carry forward limit: 4 years (stricter than normal business loss)
- Company buying/selling shares [Section 113(5)]: A company whose business includes purchase and sale of shares of other companies is deemed to be carrying on speculation business to that extent — unless (a) it is mainly a holding company or (b) its principal business is share trading, banking, or lending
- Loss from a specified business under Section 46 (cold chain, warehouse, affordable housing, hospitals, etc.) can be set off only against income from another specified business
- Carried forward indefinitely — no time limit
- Cannot be set off against regular business income
Loss from the specified activity of owning and maintaining race horses (where stake money income falls short of maintenance expenses) can be set off only against income from the same specified activity. Carry forward: 4 years.
Unabsorbed depreciation is not a "loss" in the technical sense — it is treated differently:
- No time limit — carried forward indefinitely
- Can be set off against income under any head (not just business income)
- Section 112(3) requires business loss to be set off first — unabsorbed depreciation is absorbed only after business loss is exhausted
- WDV is reduced by allowable depreciation even if not claimed or if there is a loss — Section 33(7)
Quick Reference — Set-off & Carry Forward Summary
| Loss Type | Section | Inter-Head Set-off (Current Year) | Carry Forward: Can Set Off Against | Time Limit |
|---|---|---|---|---|
| House Property | 110 | Any head — but capped at ₹2L | House property income only | 8 years |
| Business / Profession | 112 | Any head except Salaries | Any business/profession income | 8 years |
| Short-term Capital Loss | 111 | No inter-head — only capital gains | Any capital gains (STCG + LTCG) | 8 years |
| Long-term Capital Loss | 111 | No inter-head — only capital gains | LTCG only — not STCG | 8 years |
| Speculation Loss | 113 | Speculation income only | Speculation profit only | 4 years |
| Specified Business Loss | 114 | Specified business income only | Specified business income only | Indefinite |
| Race Horse Loss | 115 | Race horse income only | Race horse income only | 4 years |
| Unabsorbed Depreciation | 33(11) | Any head — unrestricted | Any head — unrestricted | No limit |
Section 116 — Accumulated Losses in Amalgamation & Demerger
Replaces Section 72A of the 1961 Act. In genuine business reorganisations, accumulated losses and unabsorbed depreciation of the predecessor entity pass to the successor — but with strict conditions to prevent loss-buying.
Eligible Amalgamations [Section 116(1)]
- Company owning an industrial undertaking, ship, or hotel merges with another company
- Banking company merges with a specified bank (SBI / nationalised bank)
- One or more public sector companies merge with another public sector company
- Erstwhile public sector company (after strategic disinvestment) merges within 5 years of restriction ending
Conditions for Loss Transfer [Section 116(4)]
| Who | Condition |
|---|---|
| Amalgamating company (loss holder) | (i) Engaged in the loss-making business for 3+ years; AND (ii) Continuously held ≥ 75% book value of fixed assets for the 2 years prior to amalgamation |
| Amalgamated company (loss recipient) | (i) Holds ≥ 75% book value of acquired fixed assets continuously for 5 years post-amalgamation; (ii) Continues the amalgamating company's business for 5 years; (iii) Fulfils other prescribed conditions for genuine purpose |
Demerger [Section 116(6)]
- Directly relatable to transferred undertaking → Entirely follows the undertaking to the resulting company
- Not directly relatable → Apportioned in the same ratio as assets retained vs transferred
Section 119 — Restrictions on Carry Forward
Section 119(1) — Change in Constitution of Firm
When a partner retires or dies and the firm's constitution changes — the firm cannot carry forward the retiring/deceased partner's proportionate share of loss to the extent it exceeds that partner's share of profits in the year.
Section 119(2) — Succession in Business
When a business is taken over by a new person (other than by inheritance) — the loss can only be carried forward by the original person who incurred it, not the successor.
Section 119(3) — Change in Shareholding of Private/Unlisted Company
For a private company or unlisted public company: accumulated losses cannot be carried forward into a tax year unless on the last day of that tax year, persons who beneficially held shares carrying ≥ 51% voting power on the last day of the loss year(s) still hold shares carrying ≥ 51% voting power.
In simple terms — if a company is sold (more than 49% of shares change hands), the accumulated losses are frozen and cannot be used by the new owners.
Exception for eligible start-ups [Section 119(3)(b)]: Start-ups under Section 140 can carry forward losses even if shareholding changes — provided all original shareholders continue to hold their shares AND the loss was incurred within 10 years of incorporation.
Other exceptions [Section 119(4)]: The 51% rule does not apply where change occurs due to: death of shareholder; gift to relative; foreign company restructuring (where 51% shareholders continue in the merged entity); IBC resolution plan; Tribunal-directed restructuring under Companies Act; or strategic disinvestment with 51% continuity.
Sections 120 & 121 — Search Income & Return Filing
Any loss — whether brought forward or current year, or unabsorbed depreciation — cannot be set off against undisclosed income detected in a search (Section 247), requisition (Section 248), or survey (Section 253, other than Section 253(4) surveys). The full undisclosed income remains taxable without benefit of any carried forward losses.
No loss can be carried forward under Sections 111, 112, 113, 114, or 115 unless the loss was determined in pursuance of a return filed under Section 263(1). If you don't file a return for the loss year — or file belatedly — the loss cannot be carried forward. Filing a belated return forfeits carry forward rights for most losses.
Practical Q&A
| Question | Answer |
|---|---|
| I have a house property loss of ₹5L and salary income of ₹18L. How much loss can I set off? | Only ₹2L inter-head under Section 109(1)(b). The remaining ₹3L is carried forward under Section 110 for up to 8 years — but can only be set off against future house property income, not salary. |
| I have LTCL of ₹10L from equity mutual funds. Can I set it off against STCG from selling land? | No — Section 111(1)(a)(ii) allows LTCL to be set off only against LTCG. Land sale STCG is not LTCG. The LTCL must be carried forward and set off against future LTCG only. |
| My business made a loss of ₹8L in FY 2026-27. I also have salary income of ₹12L. Can I set off the business loss against my salary? | No — Section 109(1)(a) explicitly bars setting off business/profession loss against salary income. The ₹8L is carried forward under Section 112 for up to 8 years and can be set off against future business income. |
| I forgot to file my ITR for FY 2024-25 in which I had a capital loss of ₹15L. Can I carry it forward? | No — Section 121 bars carry forward of capital losses unless determined in a return filed under Section 263(1). Since no return was filed for FY 2024-25, the ₹15L LTCL/STCL is permanently lost. |
| A company has ₹20L unabsorbed depreciation and ₹15L business loss brought forward. In the current year there is ₹25L business income. Which is used first? | Business loss is used first per Section 112(3). ₹15L business loss absorbed → ₹10L remaining income. Then ₹10L of unabsorbed depreciation absorbed. ₹10L unabsorbed depreciation still carried forward (indefinitely). |
| A private company was loss-making. The promoters sold 60% of shares to new investors. Can the new investors use the old losses? | No — Section 119(3) bars carry forward when 51% continuity of shareholders is broken. The old promoters held 60% (≥51%) in the loss years but now hold only 40% — continuity test fails. Accumulated losses are forfeited for the new owners. |