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

Set Off of Losses Within and Across Heads

Updated 5 October 2026 · Fact-checked

Set off means adjusting a current-year loss against income of the same tax year. First adjust within the head (intra-head), then against other heads (inter-head). Restrictions apply: house property loss against other heads is capped at ₹2,00,000, business loss cannot be set off against salary, and speculation, specified business and capital losses go only against matching income. Unabsorbed loss is carried forward.

Understand Set Off of Losses Within and Across Heads

Total income is the sum of income under five heads. A head can show a loss because one source made a loss. Set off lets you use that loss to reduce income of the same tax year, so you pay tax on the net figure.

There are two stages, and the order matters. Intra-head set off means a loss from one source is adjusted against income from another source under the same head. For example, a loss from one business is set off against profit from another business. Inter-head set off means that if a head still shows a net loss after stage one, you adjust it against positive income under other heads. Both stages are mandatory. You do not get to skip them.

The law then restricts both stages. Some losses can be set off only against a matching kind of income. Speculation business loss goes only against speculation income. Loss of a specified business goes only against income of a specified business. Long-term capital loss goes only against long-term capital gain. Short-term capital loss can go against any capital gain, short-term or long-term. Loss from owning and maintaining race horses is a separate activity: it goes only against income from that activity and is carried forward for four years. Losses from winnings of lotteries, crosswords, races (including horse races), card games, gambling and betting cannot be set off against any income.

For inter-head set off, remember three limits. House property loss can be set off against other heads only up to ₹2,00,000 in a tax year. Non-speculation business loss cannot be set off against salary. Capital loss cannot be set off against any other head. Any loss left after set off is carried forward as the law permits, which is covered in the carry forward topics.

In an exam, think of a grid. Rows are the losses, columns are the incomes they may be adjusted against. Fill the grid head by head and the answer follows.

Key rules to remember

Order of set off: Current-year loss: intra-head first → inter-head next → balance carried forward; Set off of current-year loss comes before brought-forward loss. Check the carry forward rules for the brought-forward stage.
House property loss limit: Inter-head set off of house property loss ≤ ₹2,00,000 per tax year; Intra-head set off against other house property income is unlimited. The unabsorbed balance is carried forward and is set off only against house property income.
Capital loss rules: Short-term capital loss → short-term or long-term capital gain; long-term capital loss → long-term capital gain only; Capital loss is never set off against income under any other head.
Business loss rules: Non-speculation business loss → any head except salary; speculation loss → speculation income only; specified business loss → specified business income only; Speculation profit and specified business profit can be reduced by a normal business loss. The reverse is not allowed.
Gambling-type losses: Loss from winnings of lotteries, crosswords, races (including horse races), card games, gambling, betting → no set off against any income; Such winnings are taxed on the gross amount. The loss from owning and maintaining race horses is a separate activity: it is set off only against income from that activity and carried forward for four years.
Salary: Salary income can absorb house property loss, but not business loss; The house property loss against salary still falls within the ₹2,00,000 cap.

How to solve Set Off of Losses Within and Across Heads questions

Use this sequence for any question on set off of losses. Work head by head and keep a running table.

1Compute income or loss for each source under each head separately. Do this before any set off.
2Do intra-head set off. Adjust each loss against income from other sources of the same head, but only as the matching rules allow (speculation, specified business, long-term capital loss, race horses).
3Write the net result of each head. Mark any head that still shows a loss and note which kind of loss it is.
4Do inter-head set off. Apply the limits: house property loss up to ₹2,00,000 only; no business loss against salary; no capital loss against other heads; no speculation or specified business loss against other heads.
5Keep casual and gambling-type winnings out of any set off, and do not allow gambling-type losses against anything.
6Add up the remaining positive heads to get gross total income, and note the unabsorbed losses to be carried forward with the type and the heads against which they can later be set off.
7Check that the gross total income equals the sum of positive head incomes after set off, and that each carried-forward loss equals the original loss minus the amount absorbed.

Quickest way: Loss-wise matching table

When to use it: Use it in time-pressured written answers and in case-scenario MCQs with several losses and gains.

List each loss with a tag: HP, normal business, speculation, specified business, LTCL, STCL, race horse, or gambling.
Beside each tag write where it can go: HP goes to any head but only up to ₹2,00,000; normal business goes to any head except salary; speculation, specified business and LTCL go only to their own type of income; STCL goes to any capital gain; race horse upkeep loss goes only to race horse income; gambling-type losses go nowhere.
Strike off all the losses that have no legal target in the question. These are carried forward or lost.
Set off the rest in one pass and add the remaining income. In MCQs, you do not need to decide which head absorbs which loss if the total is unaffected.

Common mistakes in Set Off of Losses Within and Across Heads

Setting off the whole house property loss against salary or other income.
Students remember that inter-head set off is allowed and forget the cap.
Fix: Apply the ₹2,00,000 limit to the inter-head adjustment. Carry forward the excess and set it off only against house property income later.
Setting off a business loss against salary.
Salary is a positive income, so it seems like a natural target.
Fix: Remember that business loss can go against any head except salary.
Setting off long-term capital loss against short-term capital gain.
Students treat all capital losses as one pool.
Fix: Short-term loss can absorb either gain, but long-term loss absorbs only long-term gain. Set the long-term loss off only against long-term gain. If the gain is not enough, carry the balance forward instead of using it against short-term gain.
Setting off speculation loss against normal business profit.
Both are under 'profits and gains of business or profession'.
Fix: Speculation loss goes only against speculation profit. The reverse works: a normal business loss can reduce speculation profit.
Allowing lottery or card game losses against winnings or other income.
Students apply the general set off rule to all income under 'income from other sources'.
Fix: No set off is allowed for such losses. Winnings are taxed on the full amount, and the loss is neither set off nor carried forward. Do not confuse this with the loss from owning and maintaining race horses, which is set off only against income from that activity and carried forward for four years.
Skipping intra-head set off and moving straight to inter-head set off.
Students compute the sources together without isolating each head.
Fix: Finish all source-wise adjustments within a head first. Only the net loss of a head can be adjusted against other heads.

Worked examples

Example 1

For tax year 2026-27, Mr. Rao, a resident individual, has: salary income ₹8,00,000; let-out property X: loss ₹4,00,000; let-out property Y: income ₹1,00,000; non-speculation business P: profit ₹1,50,000; business Q: loss ₹2,50,000; speculation profit ₹40,000; short-term capital gain ₹90,000; long-term capital loss ₹1,20,000; long-term capital gain ₹30,000; interest income ₹20,000. Assume he can claim all set offs. Compute total income and the losses to be carried forward.

Show the solution

House property, intra-head: loss of X ₹4,00,000 against income of Y ₹1,00,000 → net loss ₹3,00,000.
Business, intra-head: loss of Q ₹2,50,000 against profit of P ₹1,50,000 → net normal business loss ₹1,00,000. A normal business loss can be set off against speculation profit of ₹40,000, leaving a business loss of ₹60,000.
Capital gains, intra-head: long-term capital loss of ₹1,20,000 is set off against long-term capital gain of ₹30,000 → loss of ₹90,000 remains. It cannot be set off against the short-term capital gain. So short-term gain of ₹90,000 remains.
Inter-head, house property: the net loss is ₹3,00,000, but only ₹2,00,000 can be set off against other heads. Set it off against salary → salary becomes ₹6,00,000. Carry forward ₹1,00,000 for later set off against house property income only.
Inter-head, business: the loss of ₹60,000 cannot be set off against salary. Set it off against the short-term capital gain of ₹90,000 → ₹30,000 remains.
Other sources: interest ₹20,000 stays.
Total income = salary ₹6,00,000 + short-term capital gain ₹30,000 + interest ₹20,000 = ₹6,50,000.

Answer: Total income is ₹6,50,000. Carry forward: house property loss ₹1,00,000 (against house property income only) and long-term capital loss ₹90,000 (against long-term capital gain only).

Example 2

For tax year 2026-27, Ms. Iyer has: normal business profit ₹5,00,000; loss in speculation business ₹1,20,000; lottery winnings ₹1,00,000; loss from card games ₹40,000; short-term capital loss ₹70,000; long-term capital gain ₹2,00,000; interest income ₹30,000. Compute her total income and the losses that cannot be set off.

Show the solution

Speculation loss of ₹1,20,000 can be set off only against speculation income. She has none this year, so it cannot reduce the normal business profit of ₹5,00,000. It is carried forward.
Card game loss of ₹40,000 cannot be set off against the lottery winnings or any other income. It is also not carried forward.
Lottery winnings of ₹1,00,000 are included in full.
Capital gains: short-term capital loss of ₹70,000 can be set off against long-term capital gain of ₹2,00,000 → ₹1,30,000.
Other income: interest ₹30,000 is included in full.
Total income = ₹5,00,000 + ₹1,30,000 + ₹30,000 + ₹1,00,000 = ₹7,60,000.

Answer: Total income is ₹7,60,000. The speculation loss of ₹1,20,000 is carried forward (against speculation income only). The card game loss of ₹40,000 gets no set off and is not carried forward.

Exam tips

Lead the answer with a source-wise table. Examiners award marks for correct intra-head adjustment even if a later step has an error.
State the rule and its limit in one line before the working, such as 'House property loss set off against other heads is capped at ₹2,00,000'. This is the provision-facts-conclusion form.
In case-scenario MCQs, look for the trap: salary with business loss, long-term loss with short-term gain, or gambling loss. Strike those out first.
Always end with the carry forward figures and the heads against which they can be set off. Many questions give marks for that.
Check the assessee's regime in the question. If the question states a regime that limits loss adjustments, follow the question and write that assumption.

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

Set Off of Losses Within and Across Heads in other exams

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

Set Off of Losses Within and Across Heads: frequently asked questions

What is the difference between intra-head and inter-head set off?

Intra-head set off adjusts a loss against income from another source under the same head. Inter-head set off adjusts the net loss of one head against income under another head. You must finish the intra-head set off first.

How much house property loss can be set off against other heads?

Up to ₹2,00,000 in a tax year. Any balance is carried forward and set off only against income from house property. Within the house property head itself, the loss of one property can be set off against another property's income without this limit.

Can a business loss be set off against salary?

No. A non-speculation business loss can be set off against income under any head except salary. For speculation or specified business loss, the set off is even narrower, as it is allowed only against matching income.

Can short-term capital loss be set off against long-term capital gain?

Yes. Short-term capital loss can be set off against both short-term and long-term capital gain. Long-term capital loss can be set off only against long-term capital gain.

Are losses from lottery or gambling allowed to be set off?

No. Losses against winnings from lotteries, crosswords, races (including horse races), card games, gambling and betting cannot be set off against any income. They are also not carried forward. The loss from owning and maintaining race horses is different: it is set off only against income from that activity and carried forward for four years.