CMA Intermediate · Direct and Indirect Taxation

Set off and Carry Forward of Losses: formula sheet

Full chapter guide

Key formulas

Inter-source set off: Loss from one source ⇒ set off against income from other sources under the same head (Section 108(1)); Applies to all heads except Capital gains, unless the Act provides otherwise.
Inter-head set off: Loss under a head (other than Capital gains) ⇒ set off against income under any other head, including Capital gains (Section 109(1)); Done only after inter-source set off, in the same tax year.
Business loss and Salaries: Business or profession loss ⇏ Salaries (Section 109(1)(a)); It can be set off against house property, capital gains and other sources income.
House property loss cap: Set off against other heads ≤ ₹2,00,000 (Section 109(1)(b)); The balance is carried forward under section 110 for up to eight tax years, against house property income only.
Capital loss set off: STCL ⇒ any capital gain (ST or LT); LTCL ⇒ LT capital gain only (Section 108(2)); Capital loss cannot be set off against any other head (Section 109(2)).
Ring-fenced losses: Speculation loss ⇒ speculation profit only (s.113); specified business loss ⇒ specified business profit only (s.114); race horse loss ⇒ race horse income only (s.115); Unabsorbed amounts are carried forward; s.113 and s.115 allow four tax years.
Undisclosed income: No set off of any loss or unabsorbed depreciation against undisclosed income found in search, requisition or survey (Section 120); Applies to survey other than under section 253(4).
House property loss: time limit: Carry forward ≤ 8 tax years immediately after the tax year of first computation (section 110); Set off only against income from house property. Any unabsorbed balance moves ahead each year till the eighth year ends.
House property loss: what can be carried forward: Loss not wholly set off under section 109 → carried to the next tax year; Only the part left after inter-head set off in the current year is carried forward.
Business loss: carry forward and set off: Carried forward and set off under section 112; set off only against business or profession income; Take the time limit and any condition from section 112 itself. Speculation and specified business losses follow their own sections.
Unabsorbed depreciation: No time limit; treated as current year depreciation of the later year; Because it is treated as current year depreciation, it comes before brought forward business loss.
Order of set off in a later year: Current year depreciation → unabsorbed depreciation (treated as current year depreciation) → brought forward business loss; Within brought forward business losses, the earliest year's loss is set off first.
Section 117: amalgamation of banking companies and similar entities: Accumulated loss and unabsorbed depreciation are deemed the successor's for the year the scheme came into force; for schemes on or after 1 April 2025, eight-year count runs from the original predecessor (section 117(2)); Covers banking companies, corresponding new banks and Government general insurance companies in the listed cases. Accumulated loss means business loss, excluding speculation loss.
Section 118: co-operative banks: Accumulated loss and unabsorbed depreciation pass to the successor (amalgamation) or the resulting co-operative bank (demerger) if section 118(3) conditions are met; The predecessor must have done banking business for three or more years. The successor must hold at least three-fourths of the book value of fixed assets and continue the business for a minimum of five years. If conditions fail, the set off is deemed income of the successor under section 118(5).
Current-year set off (s.113(1)): Speculation loss → set off only against profits of another speculation business; No set off against normal business profit or any other head.
Carry forward (s.113(2)): Unabsorbed speculation loss → next tax year → speculation profits only → repeat; Set off against profits of any speculation business carried on by you in that year.
Time limit (s.113(3)): Maximum 4 tax years immediately succeeding the tax year of first computation; Compare: normal business loss under s.112 is 8 tax years; house property and capital loss also 8 years.
Company share trading (s.113(5)): Company's purchase and sale of shares of other companies = speculation business to that extent; Exceptions in s.113(6): income mainly from house property, capital gains or other sources; or principal business is share trading, banking, or granting loans and advances.
Order of giving effect (s.113(4)): Give effect to s.113 first, then to allowances under s.33(11) or s.45(7) related to the speculation business; Applies where such an allowance or part of it is to be carried forward.
Set off in the same year: Specified business loss → set off only against profits and gains of another specified business; Section 114(1). No set off against any other business or any other head.
Carry forward: Unabsorbed loss → next tax year → set off against specified business profits → balance forward again; Section 114(2)(i) and (ii). Repeats year after year.
Time limit: No number of years is stated in section 114; Contrast: section 112(2) allows eight tax years; sections 113(3) and 115(3) allow four.
Net position of specified business: Profit of other specified business − current loss − brought forward specified loss = balance profit or balance loss; If the result is negative, that amount is carried forward.
Short-term capital loss (STCL) set off: STCL → short-term capital gain, then long-term capital gain; Allowed within the same tax year. Never against other heads.
Long-term capital loss (LTCL) set off: LTCL → long-term capital gain only; Cannot be set off against short-term capital gain.
Carry forward of capital loss: Unabsorbed loss carried to the 8 tax years immediately following the loss year; Return for the loss year must be filed by the due date. Set off only against capital gains of the same kind as above.
Race horse loss: Loss from owning and maintaining race horses → income from race horses only; carry forward 4 tax years; Set off only against income from owning and maintaining race horses; carry forward needs a timely return.
Lottery, gambling and betting loss: No set off, no carry forward; Winnings are taxed at a flat special rate without deduction of expenses or losses.
Order of set off: Current year loss first, then brought-forward loss (earliest year first); Apply short-term loss rules and long-term loss rules separately to each loss.

Quick revision

Section 108 sets off a loss against other sources within the same head; capital gains follow separate rules in section 108(2). The restrictions on set off against other heads are in section 109.
Section 109: a business loss cannot be set off against salary income.
House property loss can be set off against income under other heads only up to ₹2,00,000 in the same tax year.
Capital loss cannot be set off against any other head.
A short-term capital loss can be set off against income from any other capital asset (short-term or long-term). A long-term capital loss can be set off only against income from any other long-term capital asset.
Business loss (not speculation) carries forward for at most eight tax years and sets off against business or profession profits.
Speculation loss sets off only against speculation profits and carries forward for at most four tax years.
Specified business loss under section 114 sets off only against profits of another specified business. The section as reproduced states no carry forward period, so verify the position against the latest Act and ICMAI study material.
Race horse loss under section 115 sets off only against income from that activity, for at most four tax years.
Carried forward capital loss can be used for at most eight tax years.
Section 121: a loss not determined in a return filed under section 263(1) cannot be carried forward and set off under section 111(1), 112(1), 113(2), 114(2) or 115(2).
A company that buys and sells shares of other companies is deemed to carry on speculation business to that extent, with the exceptions in section 113(6).

Common mistakes

Setting off a business loss against salary income. Fix: Remember section 109(1)(a). Business loss can go against house property, capital gains and other sources, but never Salaries.
Setting off the whole house property loss against other heads. Fix: Set off at most ₹2,00,000 under section 109(1)(b). Carry forward the rest under section 110 against house property income only.
Setting off brought forward house property loss against salary or business income. Fix: Section 110 allows carried forward house property loss only against income from house property. Inter-head set off is only for the current year under section 109.
Stating a time limit or filing condition for business loss from memory without checking section 112. Fix: Quote only the conditions you can tie to section 112 or to the facts in the question.
Setting off a speculation loss against normal business profit or salary. Fix: Remember section 113(1): speculation loss goes only against speculation profit.
Carrying forward speculation loss for eight years. Fix: Speculation loss: four tax years. Normal business loss: eight tax years.
Setting off a specified business loss against salary or other business profit. Fix: Remember section 114(1) says 'only'. The loss stays inside specified business.
Applying the eight-year limit of section 112 to specified loss. Fix: Section 114 states no limit. Section 112 (eight years) is for normal business loss, not this one.
Setting off long-term capital loss against short-term capital gain Fix: Write the rule next to your working: LTCL only against LTCG. STCL can go against both.
Setting off a capital loss against salary or business income Fix: Capital loss stays inside the capital gains head. Only capital gains can absorb it.

Exam tips

Draw a head-wise table first. Examiners give step marks for correct netting and for showing carry forward with the section.
In MCQs, look for the trap word: Salaries, Capital gains, speculation. Most options fail one of the fixed restrictions.
Always state the sequence: section 108 first, then section 109. Write the cap of ₹2,00,000 whenever house property loss appears.
Mention the carry forward period: eight tax years for house property, business and capital loss; four tax years for speculation and race horse loss.
If the question mentions search or survey, recall section 120: no loss set off against undisclosed income.
For a theory question, answer in a fixed order: head, time limit, what it can be set off against, and conditions. Four points usually earn the marks.
In numericals, write a separate line for each loss and its balance. Step marks come from showing the carry forward balance, not only the final total.
Always write the order of set off before you start: current year depreciation, unabsorbed depreciation, then brought forward business loss.