CA Intermediate · Taxation

Set-Off or Carry Forward and Set-off of Losses: formula sheet

Full chapter guide

Key formulas

Order of adjustment: Intra-head set-off → Inter-head set-off → Brought forward losses → Carry forward of balance; Current year loss is always dealt with before brought forward loss.
Business income order: Current year depreciation → Unabsorbed depreciation → Brought forward business loss; Unabsorbed depreciation is treated as part of the current year depreciation of the next year, so it is set off before the brought forward business loss.
Eight-year losses: House property loss, non-speculative business loss and capital loss: carry forward up to 8 tax years; Counted from the end of the tax year in which the loss was first computed. For capital loss, the eight years apply to both short-term and long-term capital loss, but each is set off as per its own rule.
Four-year losses: Speculation business loss and loss from owning and maintaining race horses: carry forward up to 4 tax years; Each can be set off only against income of the same kind.
No time limit: Unabsorbed depreciation and loss from specified business: carry forward indefinitely; Specified business loss is set off only against specified business profit.
Where brought forward losses can be set off: House property loss → house property income. Business loss → business profits. Short-term capital loss → short-term or long-term capital gain. Long-term capital loss → long-term capital gain only.; Brought forward non-speculative business loss can be set off only against business income, not against salary or other heads. Brought forward long-term capital loss can be set off only against long-term capital gains.
Capital loss rule: Short-term capital loss → short-term or long-term gain. Long-term capital loss → long-term gain only.; Capital loss can never be set off against income under other heads.
House property loss inter-head limit: Maximum set-off against other heads in one tax year = ₹2,00,000; The balance is carried forward. Check whether the question applies a regime that restricts inter-head set-off of this loss.
Return filing condition: Return filed by the due date → carry forward allowed for business, speculation, specified business, capital and race horse losses; Not required for house property loss and unabsorbed depreciation.
Order of set-off: Step 1: intra-head set-off → Step 2: inter-head set-off → Step 3: carry forward the balance; Current year losses are adjusted before brought forward losses. Always do intra-head for all heads first.
General intra-head rule: Loss from one source ≤ income from any other source under the same head; This is the general rule. Exceptions apply to speculation, specified business, capital gains and race horses.
Exceptions to intra-head set-off: Speculation loss → speculation profit only; Specified business loss → specified business profit only; Long-term capital loss → long-term capital gain only; Race horse loss → race horse income only; Short-term capital loss can be set off against both short-term and long-term capital gains. Non-speculation business loss can be set off against speculation profit, but not the other way round.
No set-off against winnings: Winnings from lotteries, crossword puzzles, card games and other games, and betting → taxed on the gross amount; no expense or loss is set off. Loss from an exempt source → nil set-off; There is no 'lottery loss' to set off. Do not claim any expense or loss against such winnings. A loss from an exempt source is ignored.
Inter-head exceptions: Non-speculation business loss ↛ salary; Capital loss ↛ other heads (only against capital gains, subject to the short-term/long-term rule); Race horse loss → race horse income only; Speculation and specified business loss ↛ other heads; Race horse loss can be set off only against race horse income. Non-speculation business loss (other than specified business loss) can be set off against house property, capital gains and other sources income, but not against salary or against winnings from lotteries, crosswords, card games and similar income.
House property loss limit: Set-off of house property loss against other heads ≤ ₹2,00,000 per tax year; The limit applies to the loss left after intra-head set-off. The excess is carried forward.
Net speculation result: Net speculation income = Σ profits of all speculation businesses − Σ losses of all speculation businesses (same tax year); All speculation activities are netted first. Only a net loss is carried forward.
Set-off rule for speculation loss: Speculation loss → set off only against speculation business income; Not against other business income, salary, house property, capital gains or other sources.
Carry forward period: Unabsorbed loss carried forward up to 4 tax years immediately succeeding the loss year; If the loss arose in tax year 2026-27, the years are 2027-28, 2028-29, 2029-30 and 2030-31.
Order of set-off in later years: Brought-forward speculation loss is set off against speculation income of the year, and the balance is carried forward; Set-off is available only if the loss was determined in a return filed within the due date. A speculation loss can be set off only against speculation income of later years.
Reverse position: Non-speculative business loss can be set off against speculation profit; The ring-fence is one-way: the restriction applies only to speculation loss.
Specified business loss: Loss = Profit before capital expenditure deduction - Deduction for capital expenditure - Other allowable deductions; Take the capital expenditure deduction first. Only then do you see whether there is a loss to ring-fence.
Current-year set-off rule: Specified business loss ≤ Profit from any other specified business (same tax year); The set-off is allowed only against profit from another specified business. It cannot go against any other income.
Carry forward rule: Unabsorbed loss → carried forward to next tax years, no time limit, set off only against specified business profit; Compare: speculation loss is carried forward for 4 tax years only.
One-way restriction: Other business losses → can be set off against specified business profit; specified business loss → cannot be set off against other business profit; Check which side the loss comes from before setting off.
Order of set-off in a later year: Current-year losses first, then brought-forward losses (earliest year first); This follows the general set-off sequence for business losses.
Non-speculative business loss: Carry forward: 8 tax years after the loss year | Set-off: only against business or profession income; The loss must be determined in a return filed by the due date for the loss year. Belated filing for that year forfeits the carry forward of that year's loss. It can be set off against any business of the assessee.
Unabsorbed depreciation: Carry forward: indefinite | Set-off: business income first, then any other head (including salary) for the shortfall; It is treated as the next year's current depreciation. No due-date return condition applies.
Short-term capital loss (STCL): Set-off against STCG and LTCG | Carry forward: 8 tax years; It cannot be set off against any other head. The loss year's return must be filed by the due date, or the carry forward of that loss is forfeited.
Long-term capital loss (LTCL): Set-off only against LTCG | Carry forward: 8 tax years; It can never be set off against STCG. The loss year's return must be filed by the due date, or the carry forward of that loss is forfeited.
Sequence in a year: Current-year depreciation → unabsorbed depreciation (treated as current-year depreciation) → brought-forward business loss; Unabsorbed depreciation is deducted before the brought-forward business loss. Within each type, earliest year first.
Race horse activity loss: set-off: Loss from owning and maintaining race horses → set off only against income from owning and maintaining race horses; No set-off against salary, house property, business, capital gains or any other other-sources income, including winnings from races.
Race horse activity loss: carry forward: Unabsorbed loss → carried forward for 4 tax years immediately succeeding the tax year of loss; Set off only against income from the same activity. Return must be filed by the due date. After 4 years the balance lapses.
Lottery, races, gambling, betting winnings: Winnings taxed gross at a flat special rate → no expenditure allowed, so no loss arises; Nothing to set off or carry forward. Losses incurred in gambling or betting are not allowed against any income and cannot be carried forward.
Order of set-off: Current-year intra-head → current-year inter-head → brought-forward losses → carry forward; Never set off brought-forward losses before current-year losses are fully dealt with.
House property loss: Inter-head set-off in a year ≤ ₹2,00,000; balance carried forward 8 years, against house property income only; Under the concessional regime, inter-head set-off is not allowed, so the whole loss is carried forward.
Non-speculative business loss: Current year: against any head except salary. Carried forward: 8 years, against business income only; Needs a timely return for the loss year.
Unabsorbed depreciation: Set off after brought-forward business loss; against any head except salary; carried forward without time limit; No timely return needed. Current-year depreciation is deducted first.
Speculation loss: Against speculation profit only; carried forward 4 years; Cannot be set off against non-speculative business income.
Specified business loss: Against specified business profit only; carried forward without time limit; Applies to the specified businesses with capital-linked deductions.
Capital losses: Short-term loss: against short-term or long-term gain. Long-term loss: against long-term gain only. Carry forward 8 years; Capital loss is never set off against other heads. Timely return needed.
Race horse loss: Against income from owning and maintaining race horses only; carried forward 4 years; Treat it as a separate ring-fenced pool.
Retirement or death of a partner: Earlier year's business loss carried forward by the firm = Earlier year's loss − Retired or deceased partner's share (profit-sharing ratio × that loss); Applies only on retirement or death of a partner, to the loss of the earlier year. It does not apply when only the partners' ratio changes. Unabsorbed depreciation is not reduced.
Clubbed or deemed-owned source: Income or loss of that source is taken in the transferor's computation under its own head; Set off or carry forward then follows that head's rules in the transferor's hands.

Quick revision

Set off first within the same head, then across heads, then carry forward the balance.
Speculation loss can be set off only against speculation profit and is carried forward for 4 tax years against speculation profit only.
Specified business loss is set off only against profit of a specified business and can be carried forward without any time limit.
House property loss set-off against other heads is limited to ₹2,00,000 in a tax year under the regular regime; the balance is carried forward for 8 tax years against house property income only. Under the concessional regime, no house property loss is set off against other heads; the whole loss is carried forward against house property income only.
Current year non-speculative business loss cannot be set off against salary, but it can be set off against house property, capital gains and other sources. It cannot be set off against winnings from lotteries, crosswords, races, card games and similar. The balance is carried forward for 8 years against business profits only. The concessional-regime bar applies to setting off house property loss against other heads; it does not change these business loss rules.
Unabsorbed depreciation is treated as current year depreciation of the next tax year. It can be set off against income under any head, and it is carried forward without a time limit.
Short-term capital loss can be set off against short-term or long-term capital gains; long-term capital loss only against long-term capital gains.
Capital losses are carried forward for 8 tax years. A brought forward short-term capital loss can be set off against short-term or long-term capital gains; a brought forward long-term capital loss only against long-term capital gains.
Loss from owning and maintaining race horses is set off only against race horse income and carried forward for 4 years.
Losses from gambling, lotteries and similar winnings cannot be set off against any other income; also, a loss from a source whose income is exempt is not set off.
File the return by the due date to carry forward business loss (including speculation loss) and capital loss. This condition does not apply to house property loss or unabsorbed depreciation.
The order of set-off is: current year depreciation first, then brought forward business losses (earliest year first), and then unabsorbed depreciation of earlier years. A brought forward business loss is set off only against business profit, not against other heads.

Common mistakes

Setting off non-speculative business loss against salary. Fix: Business loss can be set off against other heads but never against salary income. Mark salary as closed to business loss.
Setting off capital loss against business or other income. Fix: Capital loss is set off only against capital gains. Long-term capital loss can be set off only against long-term gain, while short-term capital loss can be set off against either short-term or long-term gain. This applies to brought forward capital loss too.
Setting off a long-term capital loss against short-term capital gain. Fix: Remember the one-way rule: long-term loss only against long-term gain; short-term loss against both.
Setting off non-speculation business loss against salary. Fix: Write 'salary: no' next to every business loss. Use house property, capital gains and other sources instead.
Setting off speculation loss against non-speculative business income or other heads. Fix: Remember that speculation business is a separate bucket. Its loss goes only against speculation profit.
Treating futures and options on a recognised stock exchange as speculative. Fix: Check the exceptions first. Eligible derivative trades on a recognised exchange and genuine hedging are not speculative.
Setting off a specified business loss against trading or other business profit. Fix: Remember that section 114 allows set-off only against specified business profit. Keep the two buckets separate.
Applying the 8-year limit to a specified business loss. Fix: A specified business loss is carried forward indefinitely. The limit of 4 years applies to speculation loss.
Setting off long-term capital loss against short-term capital gain. Fix: Remember the rule: LTCL only against LTCG. STCL against both. It is one-directional.
Setting off brought-forward business loss against income from house property or other sources. Fix: Brought-forward non-speculative business loss goes only against business income. Only unabsorbed depreciation has the wider set-off.

Exam tips

Read the facts for the return filing date before touching the numbers. A late return changes the carry forward answer.
Always show the order: intra-head, inter-head, brought forward, carry forward. Examiners give marks for the sequence as well as the figures.
In MCQs, look for restricted items such as speculation, specified business, lottery winnings and capital losses. These are the usual traps.
Write the rule in a short line before each set-off in a descriptive answer, for example 'business loss cannot be set off against salary'.
Finish every answer with a carry forward statement that gives the amount and the income it can be set off against.
In a mixed computation question, state the intra-head result for every head before you start inter-head set-off. Examiners award marks for this separation.
Learn the exceptions as a list: speculation, specified business, long-term capital loss, race horses, and exempt income. Also remember that lottery, card-game and betting winnings get no expense or loss set off. Most MCQs test one of these.
Always check the tax year the question states. For house property loss, apply the ₹2,00,000 cap and write the excess as carry forward.