CA Intermediate · Taxation

Set-Off or Carry Forward and Set-off of Losses for CA Inter Taxation

Set-off lets you use a loss against income of the same tax year. Carry forward lets you use the unabsorbed loss in later years. To solve a problem, set off intra-head first, then inter-head, then carry forward what remains, while applying each loss type's restrictions and time limits.

What this chapter covers

This chapter answers one question: what happens when a head of income shows a loss? The Income-tax Act, 2025 allows you to first set that loss off against other income of the same tax year. Whatever stays unabsorbed can often be carried forward and set off in later years. Each type of loss has its own rules on where it can be set off and for how long it can be carried forward.

The chapter has a fixed sequence. First you set off within the same head (intra-head). Then you set off against other heads (inter-head). Then you carry forward the balance. Special losses such as speculation loss, specified business loss, capital loss, race horse loss and house property loss break the general rule. Most exam marks come from knowing these exceptions.

This chapter ties together almost everything else in Section A. You need the head-wise computation of salary, house property, business, capital gains and other sources to know which figure is a loss. You also need depreciation to handle unabsorbed depreciation. The end product feeds directly into Gross Total Income, deductions and total income in the comprehensive computation questions. A mistake here carries through the rest of the answer.

Loss set-off is a routine step in the total income computation question that you will meet in Taxation, and the 70 marks of descriptive answers reward correct working step by step. The chapter also yields easy MCQs, since the rules are black-and-white: which loss can go where, and for how many years. If you learn the restrictions once as a small table in your head, you can score full marks on these questions and avoid carrying an error into Gross Total Income and total income.

Set-Off or Carry Forward and Set-off of Losses: topics in the order to study them

1Concept of Set-off and Carry Forward of LossesStart here to understand the logic: set-off in the same year first, carry forward only for what remains.
2Intra-head and Inter-head Set-off of LossesThis is the general rule and the base on which every exception is built, including the house property loss limit of ₹2,00,000 (which applies only under the regular regime, since the concessional regime allows no inter-head set-off of house property loss) and the bar on setting off business loss against salary.
3Loss from Speculation BusinessThis is the first and most commonly tested exception: speculation loss is set off only against speculation profit.
4Loss from Specified BusinessIt follows the same pattern as speculation loss but with a different carry forward period, so study it right after.
5Carry Forward of Business Losses, Depreciation and Capital LossesOnce the exceptions are clear, learn the carry forward periods, the conditions and the order of set-off for each loss type.
6Losses from Owning and Maintaining Race Horses and Other SourcesThis is a short, rule-based topic that is easy to confuse with speculation loss, so revise it after the bigger topics.
7Set-off and Carry Forward Problems and Special CasesPractise integrated problems last, when you can apply every rule together in one computation.

How to prepare Set-Off or Carry Forward and Set-off of Losses

Treat this chapter as a rulebook plus a procedure. Learn the rules in a compact grid, then practise the procedure until the order is automatic.

Make a one-page grid with one row per loss type (house property, non-speculative business, speculation, specified business, short-term capital loss, long-term capital loss, race horse, other sources). Add columns for where it can be set off in the same year, where it can be carried forward, and for how many years.
Learn the general order: set off within the same head first, then against other heads, then carry forward. Always compute each head's income or loss before you start setting off.
Memorise the key exceptions: business loss other than speculation cannot be set off against salary, house property loss is limited to ₹2,00,000 against other heads under the regular regime (the concessional regime allows no such set-off), and capital loss goes only against capital gains. Also remember that long-term capital loss goes only against long-term capital gains, while short-term capital loss goes against any capital gain. The same split applies to brought forward capital losses: a brought forward short-term capital loss can be set off against short-term or long-term capital gains, and a brought forward long-term capital loss only against long-term capital gains.
Learn the carry forward conditions: the usual period is 8 tax years, but speculation loss and race horse loss are 4 years. Specified business loss and unabsorbed depreciation have no time limit. Also learn that filing the return by the due date is needed to carry forward business losses (including speculation loss and specified business loss) and capital losses. Only house property loss and unabsorbed depreciation are exempt from this condition.
Solve problems in a fixed layout: head-wise income table, then intra-head set-off, then inter-head set-off, then Gross Total Income, then a separate carry forward statement showing the loss year and the amount left. Keep brought forward losses separate from current year losses.
Use MCQs for rule checks. Try each option against your grid and eliminate options that break a rule. Because MCQs carry no negative marking, always attempt every one.
Before the exam, redo two or three integrated problems without notes. Check that the sequence of set-off and the carry forward statement are right.
Remember the rule for the concessional (new) tax regime: house property loss cannot be set off against income of other heads. It is carried forward and set off only against house property income. The ₹2,00,000 inter-head limit applies only where the regular regime is used. Note this in your grid.

Common mistakes in Set-Off or Carry Forward and Set-off of Losses

Setting off speculation or specified business loss against ordinary business profit.
Fix: Keep a separate line for each in your working and remember that each goes only against profit of its own type.
Setting off a business loss against salary income.
Fix: Write 'except salary' next to the rule on your grid and check salary last in every inter-head set-off.
Ignoring the regime when setting off house property loss against other heads, or carrying forward the wrong amount.
Fix: Check the regime first. Under the regular regime, do intra-head set-off first, then apply the ₹2,00,000 limit to the balance and put the excess in the carry forward statement. Under the concessional regime, allow no inter-head set-off and carry the whole loss forward against house property income.
Mixing up carry forward periods, such as giving speculation loss 8 years or specified business loss 4 years.
Fix: Learn them in a table by loss type and recite it daily in the last week.
Applying brought forward losses in the wrong order or mixing them with current year losses.
Fix: Set off current year depreciation first, then brought forward business losses starting with the earliest year, and then unabsorbed depreciation of earlier years. Show the balance of each loss year separately.
Carrying forward a loss when the return was filed after the due date.
Fix: Check the filing date in every carry forward question. Remember that the due-date condition applies to business losses and capital losses, but not to house property loss or unabsorbed depreciation.

Last-day revision: Set-Off or Carry Forward and Set-off of Losses

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.

Set-Off or Carry Forward and Set-off of Losses practice questions

Set-Off or Carry Forward and Set-off of Losses 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 or Carry Forward and Set-off of Losses: frequently asked questions

What is the difference between set-off and carry forward of losses?

Set-off means using a loss against income of the same tax year. Carry forward means taking the unabsorbed loss to later tax years and setting it off there, within the rules and time limits for that loss type.

Can I set off a capital loss against salary or business income?

No. Capital loss can be set off only against capital gains. A long-term capital loss goes only against long-term capital gains, while a short-term capital loss goes against both short-term and long-term capital gains.

For how many years can losses be carried forward?

Business loss, house property loss and capital losses are generally carried forward for 8 tax years. A carried forward business loss can be set off only against business income, a house property loss only against house property income, and a capital loss only against capital gains. Speculation loss and race horse loss are carried forward for 4 years. Specified business loss and unabsorbed depreciation have no time limit.

How should I lay out a set-off and carry forward answer in the exam?

First show income or loss under each head. Then show intra-head set-off, inter-head set-off and Gross Total Income. Finish with a statement of losses carried forward by loss year. This format earns step marks even if one figure is wrong.