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Set-off and Carry Forward of Losses in India: How It Works Under the Income Tax Act 2025
When you earn income, you pay tax on it. But what happens when one source gives you a loss instead of a profit? The Income Tax Act 2025 has a built-in safety valve: you can set off that loss against income from another source in the same year, or carry it forward to reduce your tax bill in future years.
This matters because many taxpayers miss this relief. A person with a rental loss, for example, may not realise they can offset it against their salary income — reducing their total tax bill.
What is loss set-off?
Loss set-off means using a loss from one income head to reduce your taxable income in another head, in the same financial year. The Income Tax Act 2025 allows this under two routes:
- Intra-head set-off — a loss within the same income head (Section 70)
- Inter-head set-off — a loss from one head reducing income from a different head (Section 71)
After set-off, any remaining loss that could not be absorbed in the current year may be carried forward.
The five income heads under the Income Tax Act 2025
The Act groups all income into five heads:
- Salary — income from employment
- House property — rental income or loss from owned property
- Business or profession — profits or losses from any business or freelance activity
- Capital gains — profits or losses from selling assets (short-term and long-term)
- Income from other sources — interest, dividends, rental from movable property, winnings
Losses can arise in any of these heads. Here is how the Act lets you handle them.
Intra-head set-off (Section 70)
Section 70 of the Income Tax Act 2025 lets you set off a loss from one source against income from another source within the same income head.
Example — house property with multiple properties:
You own two properties. One gives you a net rental loss of ₹80,000 (after deducting interest, repairs, and taxes). The other gives you a net rental income of ₹1,20,000. Under Section 70, you can set off the ₹80,000 loss against the ₹1,20,000 income. Your taxable house property income becomes ₹40,000.
Key rule: You cannot set off a loss from a speculative business against income from a non-speculative business, or vice versa, within the same head. Speculative losses stay locked within speculative activities.
Capital gains intra-head set-off:
Short-term capital loss can be set off against both short-term and long-term capital gains. Long-term capital loss can only be set off against long-term capital gains.
Inter-head set-off (Section 71)
Section 71 of the Income Tax Act 2025 lets you set off a loss from one income head against income from a different head.
Example — house property loss against salary:
You earn ₹14,00,000 in salary. You also own a house property that gives you a net loss of ₹2,00,000 (because your home loan interest exceeds the rental income). Under Section 71, you can set off the ₹2,00,000 house property loss against your ₹14,00,000 salary income. Your total taxable income drops to ₹12,00,000.
This is one of the most commonly missed tax reliefs. Every homeowner with a home loan should check whether they have a house property loss.
Order of set-off under Section 71(1):
When you have losses from multiple heads, set them off in this order:
- House property loss is set off first against other heads
- Then other losses (business, capital gains, other sources) are set off
Losses that cannot be set off
Not every loss can be set off freely. The Income Tax Act 2025 has specific restrictions:
| Loss type | Can it be set off? | Can it be carried forward? |
|---|---|---|
| House property loss | Set off against any head | Yes, up to 8 assessment years |
| Business loss (non-speculative) | Set off against any head | Yes, up to 8 assessment years |
| Speculative business loss | Set off against speculative business income only | Yes, up to 4 assessment years |
| Capital loss (short-term or long-term) | Set off against capital gains only | Yes, up to 8 assessment years |
| Loss from other sources | Set off against any head | Yes, up to 8 assessment years |
| Loss from owning race horses | Set off against income from race horses only | Yes, up to 4 assessment years |
| Lottery, crossword puzzles, card games | Cannot be set off | Cannot be carried forward |
The new regime and loss set-off
If you are under the new tax regime (Section 202 of the Income Tax Act 2025, the default from FY 2026-27), there are important restrictions on carrying forward losses:
Under the new regime:
- House property loss can still be set off and carried forward under the new regime. You can use your home loan interest loss against other heads in the same year, and carry forward any excess for up to 8 years.
- Business loss and professional loss — under the new regime, you cannot set off business or profession losses against salary income. Losses from business or profession can only be set off against business or profession income in the same year. Unabsorbed losses can still be carried forward to future years under the new regime.
- Capital losses continue to be governed by Section 74 — short-term and long-term capital losses can only be set off against capital gains, and carried forward up to 8 years.
Old regime: All loss types (house property, business, capital gains, other sources) could be set off against any head and carried forward. The old regime is no longer the default but remains available as an option if you have losses to carry forward.
Carry forward of losses
When a loss cannot be fully set off in the current year, you can carry it forward to future years. The Income Tax Act 2025 sets these limits:
| Loss type | Maximum carry forward years |
|---|---|
| House property loss | 8 assessment years |
| Business or profession loss (non-speculative) | 8 assessment years |
| Speculative business loss | 4 assessment years |
| Capital loss (short-term or long-term) | 8 assessment years |
| Loss from owning race horses | 4 assessment years |
Key condition: To carry forward a loss, you must file your ITR on time — by the due date under Section 139(1). A loss that is not shown in your original ITR return cannot be carried forward (the exception is if you file a belated return, but late fees and interest may apply, and the loss carry forward rules are more restrictive).
Worked example — house property loss and salary
You are a salaried employee earning ₹16,00,000 per year. You also own a self-occupied house property with a home loan. The interest on your home loan for the year is ₹3,00,000. Since the property is self-occupied, the annual value is zero. Your house property income is:
- Gross annual value: ₹0
- Less: Municipal taxes: ₹0
- Net annual value: ₹0
- Less: Interest on home loan: ₹3,00,000
- House property loss: ₹3,00,000
Under Section 71, you set off the ₹3,00,000 house property loss against your salary income:
- Salary income: ₹16,00,000
- Less: House property loss set off: ₹3,00,000
- Taxable salary income: ₹13,00,000
You save tax on ₹3,00,000 at your slab rate. If you are in the 30% bracket, that is ₹90,000 saved (ignoring the standard deduction under Section 16).
If you could not set off the loss (because you did not know about it), you would pay tax on ₹16,00,000 instead of ₹13,00,000 — an extra ₹90,000 in tax.
Worked example — capital gains loss against salary (old regime only)
You are on the old regime. You earn ₹12,00,000 in salary. You also sold a equity mutual fund and made a short-term capital loss of ₹1,50,000.
Under Section 71 (old regime), you set off the ₹1,50,000 capital loss against your salary income:
- Salary income: ₹12,00,000
- Less: Capital loss set off: ₹1,50,000
- Taxable income: ₹10,50,000
Note: Under the new regime, you cannot set off capital losses against salary income. The loss would need to be set off against other capital gains in the same year, or carried forward.
Common mistakes to avoid
Mistake 1 — Missing the ITR filing deadline for loss returns
If you have a loss and want to carry it forward, you must file your ITR by the due date. Filing a belated return (after the due date) restricts your ability to carry forward certain losses. The due date for individuals not requiring tax audit is July 31 of the assessment year.
Mistake 2 — Confusing speculation losses with regular business losses
Speculative transactions (contracts where you buy and sell within the same settlement period) produce losses that can only be set off against speculative profits. If you have a loss from intraday equity trading classified as speculation, you cannot set it off against your salary.
Mistake 3 — Assuming losses under the new regime work like the old regime
The new regime restricts inter-head set-off for business losses. If you switched from the old regime to the new, any business loss you could previously have set off against salary can no longer be used that way. Plan your switch carefully if you have accumulated business losses.
Mistake 4 — Not disclosing losses in the original ITR
Even if your tax liability is zero after set-off, you must file an ITR showing the loss if you want to carry it forward. A nil return with no loss disclosure forfeits the carry forward right.
Frequently asked questions
Can I set off more than one loss against my salary income?
Yes. You can set off house property loss, business loss, capital loss, and other-source losses all against your salary income under Section 71 (old regime). Under the new regime, only house property loss and capital losses (against capital gains) have specific treatment — business losses cannot be set off against salary.
What happens to my house property loss if I switch from old to new regime?
You can continue to set off and carry forward house property loss even under the new regime. This is one of the few loss types that is not restricted by the new regime.
Can I carry forward a loss if I have no income in a future year?
No. You can only carry forward a loss if you have income in the year to which you want to set it off. The loss reduces your taxable income in that future year. If you have no income in any of the 8 years, the loss lapses.
Do losses from intraday equity trading qualify for carry forward?
Intraday equity trading is treated as a speculative business. Losses from speculative transactions can only be set off against speculative profits and carried forward for up to 4 years — not the usual 8. Losses from delivery-based equity trading (classified as capital gains) follow capital loss rules: set off against capital gains only, carry forward up to 8 years.
How do I disclose losses in my ITR?
File ITR-1 or ITR-2 as applicable, and fill in the loss schedules (Schedule CFL for carried forward losses, Schedule BP for business/profession losses, Schedule HP for house property losses, Schedule CG for capital gains losses). Consult a CA if your loss situation is complex.
Data verified on 2026-10-08 against the Income Tax Act 2025 (Section 70, 71, 72, 74) and the Income-tax Rules 2026. Tax law changes frequently; confirm with a qualified CA or the income tax department before filing.
Sources: Income Tax Act 2025 (Income-tax India), Income Tax Department - Home