Direct Tax Laws & International Taxation · Aggregation of Income, Set Off or Carry Forward of Losses

Losses of Specified Business: Set Off and Carry Forward (Section 114)

Updated 5 October 2026 · Fact-checked

Loss from a specified business is the loss computed after claiming the special capital expenditure deduction. Under section 114 of the Income-tax Act, 2025, you can set it off only against profits of any specified business. Unabsorbed loss is carried forward without a time limit, again only against specified business profits. Compute each specified business separately, then net them.

Understand Losses of Specified Business

Some businesses get a special deduction for capital expenditure, often the whole cost in the year it is incurred. These are called specified businesses. Examples are cold chain facilities, warehouses for agricultural produce, hospitals and affordable housing projects. Because the deduction is large, the business often shows a loss in the early years.

The law does not want this loss to wipe out your tax on ordinary income. So section 114 ring-fences it. A loss computed for a specified business can be set off only against profits of a specified business. It cannot be set off against salary, house property, capital gains, other sources or any non-specified business.

The ring is wider than one business. The loss of one specified business can be set off against the profit of any other specified business of the same person. You do not need the two businesses to be of the same kind.

If the loss is not fully absorbed in the year, the balance is carried forward to the following tax years. It is set off against profits of specified businesses only. There is no time limit for this carry forward. To keep the right to carry forward, you must file the return by the due date, as with other business losses.

The restriction works in one direction. Profit of a specified business can be reduced by other eligible losses, such as a brought forward business loss. But specified business loss cannot reduce other income. Do not confuse this with speculation loss, which is also ring-fenced but has a different carry forward period and a different pool of profits.

Key rules to remember

Set off rule: Loss of specified business → set off only against profit of any specified business; No set off against any other income or non-specified business profit, in the same year or later years.
Current year netting: Net specified business result = Σ profits of specified businesses − Σ losses of specified businesses; Do this before any carry forward. A net profit is taxable after brought forward set off; a net loss is carried forward.
Carry forward: Unabsorbed specified business loss → carried forward to next tax years, no time limit; Set off only against specified business profits. Return must be filed by the due date.
Measure of the loss: Loss = specified business profit computed after the capital expenditure deduction; The loss is the figure after the special deduction, not before it.
Comparison with speculation loss: Speculation loss: against speculation profit only, 4 tax years. Specified business loss: against specified business profit only, no time limit; Both are ring-fenced. Only the specified business loss carries forward indefinitely.

How to solve Losses of Specified Business questions

Use this order for any question that mentions a specified business, a special capital expenditure deduction or a loss that cannot be set off against other income.

1Identify each specified business the person carries on. Treat it separately from all other businesses.
2Compute the profit or loss of each specified business after the capital expenditure deduction and normal business expenses.
3Net the specified businesses against each other for the year. A loss in one can absorb the profit of another.
4If a net profit remains, set off the brought forward specified business loss against it. Then use other eligible losses if the facts allow.
5If a net loss remains, do not set it off against any other head or business. Carry it forward, with no time limit.
6Compute other heads and other businesses separately. Add the taxable specified business profit, if any, to reach the total income.
7Check the return was filed by the due date. State the closing loss to be carried forward and note that it can be used only against specified business profits.

Quickest way: Ring-fence and net

When to use it: Use it for short MCQs and for the set off part of a larger computation question.

Put all specified businesses in one box and everything else in another.
Add profits and losses inside the specified box to get one net figure.
Deduct brought forward specified business loss from a positive net figure.
If the net is negative, leave it out of total income and carry the whole amount forward.
Add the surviving box figure to the other income. Never let the specified box lose money into the other box.

Common mistakes in Losses of Specified Business

Setting off specified business loss against profit of a non-specified business or other heads.
Students apply the general rule that business loss can be set off against any other business income.
Fix: Remember that section 114 ring-fences the loss. Only profit of a specified business can absorb it.
Applying the speculation loss 4-year limit to specified business loss.
Both losses are ring-fenced, so students merge the rules.
Fix: State clearly: speculation loss, 4 tax years; specified business loss, no time limit.
Allowing set off only against the same specified business.
Students confuse it with the speculation rule, where the pool is a single type of business.
Fix: The loss can be set off against profit of any other specified business of the same person.
Forgetting the capital expenditure deduction when computing the loss.
Students compute the loss before the special deduction, or claim normal depreciation on the same asset as well.
Fix: Compute the profit after the special deduction. Do not claim depreciation again on an asset for which the deduction was taken.
Carrying forward the loss without checking the return filing condition.
Questions often state the facts in a few lines and the due date is overlooked.
Fix: Check that the return was filed by the due date. If it was not, state that the right to carry forward is lost.
Saying specified business profit cannot be reduced by any loss.
Students over-read the ring-fencing rule, which only restricts specified business losses from leaving the pool.
Fix: Other eligible losses, such as brought forward business loss, can reduce specified business profit. The restriction applies one way only.

Worked examples

Example 1

Mr Rao runs a warehousing facility that qualifies as a specified business. In tax year 2026-27 its profit, after the capital expenditure deduction, is a loss of ₹12,00,000. He also has profit from a trading business of ₹8,00,000 and salary income of ₹6,00,000. Compute his income for the year and state the treatment of the loss. Assume the return is filed on time.

Show the solution

The warehousing loss of ₹12,00,000 arises in a specified business, so section 114 applies.
It cannot be set off against the trading business profit of ₹8,00,000, because that is not a specified business.
It cannot be set off against salary of ₹6,00,000 either.
Business income is therefore ₹8,00,000. Salary is ₹6,00,000.
Gross total income = ₹8,00,000 + ₹6,00,000 = ₹14,00,000 before any deductions.
The whole ₹12,00,000 loss is carried forward. It can be set off only against future profits of specified businesses, with no time limit.

Answer: Gross total income is ₹14,00,000. The specified business loss of ₹12,00,000 is carried forward, for set off only against specified business profits of later tax years, without a time limit.

Example 2

A company carries on three businesses in tax year 2026-27. Hospital (specified business): loss ₹5,00,000. Cold chain (specified business): profit ₹7,00,000. Manufacturing (not specified): profit ₹10,00,000. It has a brought forward specified business loss of ₹1,50,000 from an earlier year. Compute the business income and the loss to be carried forward. Assume the return is filed on time.

Show the solution

Net the specified businesses: ₹7,00,000 profit less ₹5,00,000 loss = ₹2,00,000 profit.
Set off the brought forward specified business loss: ₹2,00,000 less ₹1,50,000 = ₹50,000.
Manufacturing profit of ₹10,00,000 is computed separately.
Business income = ₹50,000 + ₹10,00,000 = ₹10,50,000.
Brought forward loss is fully used, so nothing remains to carry forward.

Answer: Business income is ₹10,50,000. No specified business loss remains to be carried forward.

Exam tips

In written answers, begin with the rule: loss of specified business set off only against profits of specified business, under section 114.
In case scenarios, first underline which businesses are specified. Everything else is outside the ring.
Show the netting of specified businesses as a separate working before bringing in brought forward loss.
Always end with the closing carried forward balance and its limits. Marks are often given for stating the no time limit point.
If a comparison with speculation loss is asked, draw two columns in your answer: pool of profits and carry forward period.

Practice questions from Aggregation of Income, Set Off or Carry Forward of Losses

Losses of Specified Business in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Losses of Specified Business: frequently asked questions

Can I set off specified business loss against my salary or capital gains?

No. Under section 114, specified business loss can be set off only against profits of a specified business. Salary, capital gains and all other heads stay outside the set off.

For how long can specified business loss be carried forward?

There is no time limit. The loss keeps carrying forward to later tax years until it is absorbed by profits of specified businesses. You must file the return by the due date to keep this right.

What is the difference between specified business loss and speculation loss?

Both can be set off only against profits of their own kind. Speculation loss is set off against speculation profit and can be carried forward for 4 tax years. Specified business loss is set off against profit of any specified business and can be carried forward without a time limit.

Can loss of one specified business be set off against profit of another specified business?

Yes. The pool is all specified businesses of the same person, not a single business. You net them in the same year before dealing with brought forward loss.