Set-off and carry forward of losses — house property, capital and business rules

Introduction

Tax losses do not always mean that the taxpayer has permanently lost the benefit of those losses. Under Indian income-tax law, eligible losses can generally be set off against specified income in the same tax year and, where they cannot be fully absorbed, carried forward to subsequent years subject to prescribed conditions and time limits.

This is particularly important for taxpayers having:

Loss from house property

Business or professional losses

Short-term capital losses

Long-term capital losses

Speculation losses

Specified business losses

Unabsorbed depreciation

The rules are not identical for every category. A loss from a house property, for example, has a different set-off restriction from a capital loss, while a normal business loss cannot generally be adjusted against salary income.

FY 2026-27 is also significant because the Income-tax Act, 2025 applies from 1 April 2026. The Income Tax Department has clarified that losses arising under the earlier Income-tax Act, 1961 continue to be available under the new Act, subject to the original conditions and remaining carry-forward period.

What is Set-Off of Loss?

Set-off means adjusting a loss against eligible income.

There are two broad types:

Intra-head Set-Off

Loss from one source is adjusted against income from another source under the same head of income, subject to the applicable restrictions.

Inter-head Set-Off

After intra-head adjustment, an eligible remaining loss may be adjusted against income under another head, subject to specific restrictions.

For example, a current-year house-property loss can generally be adjusted against income under other heads, but the amount that can be so adjusted is subject to a statutory limit.

What is Carry Forward of Loss?

If an eligible loss cannot be completely set off during the year in which it arises, the balance may be carried forward to subsequent years.

The carried-forward loss can then be adjusted only according to the rules applicable to that particular category of loss.

Therefore:

Set-off = adjustment in the current year

Carry forward = preservation of eligible unabsorbed loss for future years

Order of Loss Adjustment

A taxpayer should generally consider the loss adjustment in the following broad sequence:

Step 1

Calculate income under each head.

Step 2

Apply intra-head set-off wherever permitted.

Step 3

Apply inter-head set-off wherever permitted.

Step 4

Adjust eligible brought-forward losses.

Step 5

Carry forward the remaining eligible losses.

The new ITR forms for Tax Year 2026-27 continue to separately report current-year loss adjustment in Schedule CYLA and brought-forward loss adjustment in Schedule BFLA.

4. Loss from House Property

House-property loss is one of the most frequently misunderstood areas.

A taxpayer may incur a loss where, for example:

Home-loan interest is high;

Rental income is relatively low; or

The property is self-occupied and eligible interest deduction exceeds the applicable annual income.

Current-Year House Property Loss

Under the general tax regime, a house-property loss can be set off against income from other heads, subject to the statutory limit.

Maximum inter-head set-off:

₹2 lakh per year

Therefore, if a taxpayer has:

House property loss = ₹5 lakh

and other taxable income of ₹10 lakh, only:

₹2 lakh

can generally be adjusted against other heads in the current year.

The remaining:

₹3 lakh

can be carried forward, subject to the applicable rules. The Income Tax Department confirms that the balance can generally be carried forward for up to eight assessment years.

Carry Forward of House Property Loss

A house-property loss can generally be carried forward for:

8 assessment years immediately succeeding the assessment year in which the loss was incurred

The carried-forward loss can subsequently be set off against income from house property, subject to the applicable provisions.

Example

FY 2026-27:

House-property loss = ₹6 lakh

Current-year permissible inter-head set-off = ₹2 lakh

Balance carried forward = ₹4 lakh

The ₹4 lakh does not disappear. It can be utilised in subsequent years against eligible house-property income, subject to the prescribed rules.

🆕 House Property Loss Under New Tax Regime

This is an important planning point.

Under the new tax regime, the Income Tax Department states that for a let-out property, although actual interest deduction can be available without the general ₹2 lakh interest ceiling, a resulting house-property loss cannot be set off against income under other heads and cannot be carried forward to future years under the new regime.

Therefore, taxpayers with substantial home-loan interest should compare the old and new regimes carefully.

5. Business Loss

Business losses are generally governed separately from house-property losses.

A normal business loss can generally be set off against eligible business income and, subject to statutory restrictions, against income under other heads other than salary.

It cannot ordinarily be adjusted against salary income.

Example — Business Loss

Suppose:

Business loss = ₹5 lakh

Salary income = ₹12 lakh

Interest income = ₹2 lakh

The business loss cannot generally be used to reduce salary income.

The taxpayer must apply the applicable intra-head/inter-head set-off rules to determine what portion, if any, can be adjusted against eligible non-salary income.

Carry Forward of Normal Business Loss

A normal business loss can generally be carried forward for:

8 assessment years

It can subsequently be set off against eligible business/professional income in accordance with the applicable rules.

The Income Tax Department specifically confirms that old-law business losses continue under the Income-tax Act, 2025 and retain their original carry-forward period; for example, an AY 2023-24 eligible business loss cannot be carried beyond the original eight-year period merely because the new Act has come into force.

Timely Filing of Loss Return

This is a critical compliance condition.

For several categories of losses, including normal business losses and capital losses, the taxpayer generally needs to file the return of loss within the prescribed due date under Section 139(1) in order to carry the loss forward.

The Income Tax Department specifically states this requirement for capital losses.

Therefore:

If you have a loss that you want to preserve for future years, filing the return on time is extremely important.

6. Capital Loss

Capital losses arise when the taxpayer transfers a capital asset for less than its relevant taxable cost/value.

Capital losses are broadly divided into:

Short-Term Capital Loss (STCL)

and

Long-Term Capital Loss (LTCL)

The set-off rules are different.

Short-Term Capital Loss

A short-term capital loss can generally be set off against:

Short-term capital gains; and

Long-term capital gains.

This makes STCL comparatively flexible.

Example

STCL = ₹3 lakh

STCG = ₹1 lakh

LTCG = ₹4 lakh

The ₹3 lakh STCL can generally be adjusted against the eligible capital gains, subject to the applicable rules.

Long-Term Capital Loss

Long-term capital loss has a more restrictive set-off rule.

It can generally be set off only against long-term capital gains.

It cannot generally be adjusted against:

Salary

Business income

Interest income

Short-term capital gains

The Income Tax Department confirms that LTCL can be adjusted only against LTCG, while STCL can be adjusted against both STCG and LTCG.

Carry Forward of Capital Loss

Both eligible:

Short-Term Capital Loss; and

Long-Term Capital Loss

can generally be carried forward for:

8 assessment years

immediately succeeding the year in which the loss was incurred.

However, the loss must satisfy the applicable return-filing requirements.

Capital Loss Example

Suppose in FY 2026-27:

STCL = ₹5 lakh

LTCG = ₹2 lakh

STCG = ₹1 lakh

The taxpayer can potentially use:

₹1 lakh STCL against STCG

and

₹2 lakh STCL against LTCG

Remaining STCL:

₹2 lakh

can potentially be carried forward, subject to the applicable conditions.

7. Business Loss vs Capital Loss

Particular	Business Loss	Capital Loss
Set-off against Salary	❌	❌
Set-off against Business Income	✅	❌
STCL against STCG	—	✅
STCL against LTCG	—	✅
LTCL against STCG	—	❌
LTCL against LTCG	—	✅
General carry-forward period	8 years	8 years
Timely loss return important	✅	✅

8. Speculation Business Loss

Speculative business losses are subject to special rules.

A speculation loss cannot generally be adjusted against normal business income.

It is ordinarily set off against speculation business profits.

The carry-forward period is generally:

4 assessment years

Therefore, taxpayers engaged in speculative transactions need to maintain separate records.

9. Specified Business Loss

Specified business covered by the relevant provisions, including eligible businesses referred to under Section 35AD of the old Act, has another special regime.

A specified-business loss is generally set off against profits of specified business.

Unlike normal business losses, the carry-forward mechanism is more restrictive in terms of the income against which the loss can be utilised.

The ITR framework separately identifies losses from:

Normal business

Speculative business

Specified business

Life-insurance business

in the carry-forward schedule.

10. Unabsorbed Depreciation

Unabsorbed depreciation should be distinguished from ordinary business loss.

Where depreciation cannot be fully absorbed because there is insufficient taxable income, the unabsorbed amount can generally be carried forward under the applicable provisions and utilised against future income according to the statutory rules.

The important distinction is that unabsorbed depreciation does not follow exactly the same eight-year limitation applicable to normal business losses.

It therefore needs to be tracked separately in the tax computation.

11. Loss from Owning and Maintaining Race Horses

Loss from the activity of owning and maintaining race horses is subject to special provisions.

Such loss is generally:

Set off only against income from the same activity; and

Subject to a limited carry-forward period.

The ITR carry-forward schedule separately identifies race-horse losses.

Complete Loss Carry-Forward Reference

Type of Loss	Current-Year Set-Off	Carry Forward
House Property Loss	Other heads subject to ₹2 lakh limit under general regime	8 years
Normal Business Loss	Eligible heads, not salary	8 years
Short-Term Capital Loss	STCG + LTCG	8 years
Long-Term Capital Loss	LTCG only	8 years
Speculation Loss	Speculation profit	4 years
Specified Business Loss	Specified business income	Special rules
Race Horse Loss	Race-horse income	4 years
Unabsorbed Depreciation	As permitted under depreciation provisions	Generally no 8-year cap

🆕 12. What Happens to Old Losses After 1 April 2026?

The introduction of the Income-tax Act, 2025 does not cause existing eligible losses to disappear.

The Income Tax Department has specifically clarified that losses computed under the Income-tax Act, 1961 for tax years beginning before 1 April 2026 continue to be carried forward under the new Act through the repeal-and-savings provisions.

House Property Loss

Old house-property losses remain available under the corresponding rules of the old Act.

Business Loss

Old business losses remain available, subject to the original carry-forward period and conditions.

Capital Loss

Old STCL and LTCL also continue and retain their original character and utilisation restrictions.

This is particularly important when preparing Tax Year 2026-27 returns because taxpayers may have a combination of:

Losses arising before 1 April 2026; and

Losses arising under the new Income-tax Act, 2025.

13. How Losses Are Reported in the ITR

The new ITR forms continue to maintain dedicated schedules for loss adjustment.

Schedule CYLA

Current Year Loss Adjustment

This captures the set-off of current-year losses.

Schedule BFLA

Brought Forward Loss Adjustment

This captures the utilisation of losses brought forward from earlier years.

Schedule CFL

Carry Forward of Loss

This records eligible losses that remain available for future years.

The notified Tax Year 2026-27 ITR forms separately identify house-property, business, speculative, specified-business, capital and other categories of losses.

14. Common Mistakes

Treating Every Loss as Interchangeable

A capital loss cannot simply be adjusted against business income.

Adjusting LTCL Against STCG

Long-term capital loss is generally restricted to long-term capital gains.

Adjusting Business Loss Against Salary

Normal business loss cannot generally be set off against salary income.

Missing the Loss Return Deadline

Failure to file the return within the prescribed deadline can prevent carry-forward of certain losses.

Forgetting Old Losses

Taxpayers should maintain a year-wise loss register rather than relying only on memory or previous ITR copies.

Mixing Speculation and Normal Business

Speculation losses have separate set-off and carry-forward rules.

Ignoring the New Tax Regime

The treatment of house-property losses can differ materially under the new regime.

Practical Loss Management Checklist

Businesses and individuals should maintain a year-wise loss register containing:

Assessment/Tax Year

Type of loss

Original amount

Amount set off

Balance carried forward

Expiry year

Return filing date

Relevant supporting ITR

Relevant computation

Future utilisation

This becomes especially important for companies with several years of accumulated business losses.

Example — Complete Set-Off Scenario

Suppose a taxpayer has the following in FY 2026-27:

Salary income: ₹15 lakh

Business profit: ₹5 lakh

House-property loss: ₹4 lakh

STCL: ₹2 lakh

LTCG: ₹3 lakh

The losses cannot simply be combined and deducted from total income.

The taxpayer must separately apply:

House Property

Only the permitted amount can be set off against other heads under the general regime.

STCL

Can generally be adjusted against eligible STCG/LTCG.

Business Loss

If there is a business loss instead of profit, it cannot generally be adjusted against salary.

This demonstrates why loss computation must be performed head-wise and category-wise.

Conclusion

The rules for set-off and carry forward of losses are designed to ensure that taxpayers can obtain relief for genuine economic losses while preventing inappropriate cross-utilisation between different categories of income.

The most important rules to remember are:

House-property loss: generally subject to a ₹2 lakh annual inter-head set-off limit under the general regime, with eligible balance carried forward for up to 8 years.

Normal business loss: generally carried forward for up to 8 years and set off against eligible business income; it cannot generally be adjusted against salary.

STCL: can generally be set off against both STCG and LTCG.

LTCL: can generally be set off only against LTCG.

Capital losses: generally carried forward for 8 years, provided the applicable loss-return filing requirement is satisfied.

Speculation losses: have separate and more restrictive rules.

Unabsorbed depreciation: needs separate treatment and should not be confused with ordinary business loss.

Old losses: continue after the transition to the Income-tax Act, 2025, subject to their original conditions and remaining carry-forward period.

For FY 2026-27, taxpayers should therefore maintain a proper loss schedule year-wise, verify the applicable tax regime, distinguish between current-year and brought-forward losses, and ensure that the original loss return was filed within the prescribed deadline wherever required.

Proper loss planning can significantly reduce future tax liability, but only when each loss is utilised against the correct category of income and within the permitted time period.

Stay Connected With TAXAJ

Want regular updates on Income Tax, GST, Accounting, Payroll, ROC, Capital Gains, Audit and Business Compliance? 📊

Join TAXAJ on WhatsApp

https://whatsapp.com/channel/0029VaAOrtiFCCoQlhtGIx2o

Explore More Informational Content on YouTube

https://www.youtube.com/@taxajca

Call or WhatsApp Us

+91 8802912345

TAXAJ

Helping businesses simplify accounting, taxation and compliance.