Taxation · Set-Off or Carry Forward and Set-off of Losses

Carry Forward of Business Losses, Depreciation and Capital Losses

Updated 4 October 2026 · Fact-checked

Carry forward lets you use a loss you could not set off this tax year in later years. Non-speculative business loss and capital losses carry forward for eight tax years. Unabsorbed depreciation carries forward indefinitely. Solve by setting off current-year items first, then brought-forward items in order, earliest year first, within each loss's allowed income.

Understand Carry Forward of Business Losses, Depreciation and Capital Losses

A loss that cannot be fully set off in the year it arises is not wasted. The law lets you carry it forward and set it off against income of later tax years. Each type of loss has its own rules on how long it lasts and what income it can be set off against.

Non-speculative business loss (a loss from a normal business or profession, not speculation and not specified business) can be carried forward for eight tax years immediately after the tax year of the loss. It can be set off only against income from business or profession. It need not be the same business, and the business need not still be running. The loss must have been determined in a return filed by the due date for the loss year. If the return for that loss year is filed late, the carry forward of that year's loss is forfeited.

Unabsorbed depreciation is the depreciation that could not be absorbed because the business income, and the income under other heads, was too low in that year. It is carried forward without any time limit. In the next year it is treated as part of that year's depreciation, so it is first absorbed by that year's business income. Only the shortfall can be set off against income under any other head, including salary. This wider set-off is the difference from business loss. There is no condition that the return was filed on time.

Capital losses are carried forward for eight tax years and only against capital gains. A short-term capital loss can be set off against both short-term and long-term capital gains. A long-term capital loss can be set off only against long-term capital gains. Capital losses must also be determined in a return filed by the due date for the loss year. Late filing for that year forfeits the carry forward of that year's capital loss.

Only the person who incurred the loss can carry it forward, except in cases of succession, amalgamation or demerger covered in other topics. Within each type of loss, the earliest year's loss is set off first. Losses of speculation business, specified business and house property have their own rules, which are covered in separate topics.

Key rules to remember

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.

How to solve Carry Forward of Business Losses, Depreciation and Capital Losses questions

Use this method for any carry forward or set-off question. Work head by head and keep a separate schedule for each loss.

1List the brought-forward items by type and year: business loss, unabsorbed depreciation, STCL, LTCL. Note the year of each.
2Compute each head's current-year income first. For business, deduct current-year depreciation before anything else.
3Apply current-year set-off. This covers intra-head set-off first, then inter-head set-off, using the rules for each loss.
4Set off unabsorbed depreciation. It is treated as current-year depreciation, so deduct it from business income first. Only if business income is not enough, set the shortfall off against any other head, including salary.
5Set off the brought-forward business loss, earliest year first, against the business income that remains. It goes against business income only.
6Set off brought-forward STCL against STCG and then LTCG. Set off brought-forward LTCL against LTCG only. Take the earliest year first.
7Check that no loss is being used after its eight-year limit and that the return-filing condition is met. Then compute gross total income.
8Write the closing balance of each loss to carry forward, with the tax year until which it can be used (unabsorbed depreciation has no limit).

Quickest way: Three-column loss tracker

When to use it: Use it in any problem with brought-forward items. It works for both MCQs and written answers.

Draw three columns: Business loss, Unabsorbed depreciation, Capital losses. Write the amounts and years in each.
Ask one question for each loss: what income can it be set off against? Business loss: business only. Depreciation: business first, then any other head, including salary, for the shortfall. LTCL: LTCG only. STCL: any capital gain.
For MCQs, check the traps first. Is LTCL set against STCG? Is the period eight years? Was the return filed late? Is business loss being set off against salary or another non-business head? Wrong options usually break one of these.
In written answers, show the order as numbered lines: current depreciation, unabsorbed depreciation, b/f business loss. Each line earns its step marks.
Close with a carry-forward statement. Examiners usually award a mark for it.

Common mistakes in Carry Forward of Business Losses, Depreciation and Capital Losses

Setting off long-term capital loss against short-term capital gain.
Students remember that STCL can be set off against both and assume the same applies to LTCL.
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.
It gets mixed up with unabsorbed depreciation, which can be set off against other heads.
Fix: Brought-forward non-speculative business loss goes only against business income. Only unabsorbed depreciation has the wider set-off.
Setting off brought-forward business loss before unabsorbed depreciation.
Students take the items in the order they appear in the question, or assume a loss ranks before depreciation.
Fix: Use the standard sequence: current depreciation, then unabsorbed depreciation, then brought-forward business loss. Unabsorbed depreciation is treated as current-year depreciation, so it is deducted first.
Applying an eight-year limit to unabsorbed depreciation.
Business loss and capital losses have the eight-year limit, so students apply it to everything.
Fix: Unabsorbed depreciation carries forward indefinitely. Write 'no time limit' in the answer.
Allowing carry forward when the return was filed late.
Students overlook the condition about filing by the due date.
Fix: Business loss and capital losses can be carried forward only if the loss was determined in a return filed by the due date. A belated return forfeits the carry forward. Unabsorbed depreciation is not affected by this condition.
Counting the eight years from the wrong point.
Students include the loss year itself or count from the year of set-off.
Fix: Count eight tax years immediately after the loss year. A loss of tax year 2026-27 can be used up to tax year 2034-35.

Worked examples

Example 1

Mr. Raman, a resident individual, has the following for tax year 2026-27. Business profit before current depreciation: ₹6,00,000. Current-year depreciation: ₹2,00,000. Income from house property: ₹80,000. Interest on bank deposits: ₹40,000. Brought forward: business loss of tax year 2022-23 ₹1,50,000; business loss of tax year 2024-25 ₹1,00,000; unabsorbed depreciation ₹3,00,000. All returns were filed on time. Compute gross total income and the amount to carry forward.

Show the solution

Business income after current depreciation = ₹6,00,000 − ₹2,00,000 = ₹4,00,000.
Unabsorbed depreciation is treated as current-year depreciation, so deduct it next. Set off ₹3,00,000 against business income: ₹4,00,000 − ₹3,00,000 = ₹1,00,000. It is fully absorbed by business income, so nothing is set off against house property or interest income.
Now set off the brought-forward business loss, earliest year first. The 2022-23 loss is ₹1,50,000 and the business income left is ₹1,00,000. Business income becomes nil and ₹1,50,000 − ₹1,00,000 = ₹50,000 of the 2022-23 loss is left. It can be used up to tax year 2030-31, so it is within the limit.
The 2024-25 loss of ₹1,00,000 finds no business income left, so it is carried forward in full. It can be used up to tax year 2032-33.
Business income = nil. Business loss cannot be set off against house property or interest income.
Gross total income = house property ₹80,000 + interest ₹40,000 = ₹1,20,000.
Carry forward: business loss ₹50,000 (tax year 2022-23) and ₹1,00,000 (tax year 2024-25). No unabsorbed depreciation is left.

Answer: Gross total income is ₹1,20,000. Carry forward business loss of ₹50,000 (tax year 2022-23, usable up to tax year 2030-31) and ₹1,00,000 (tax year 2024-25, usable up to tax year 2032-33). No unabsorbed depreciation is left.

Example 2

For tax year 2026-27, Ms. Sneha has short-term capital gain of ₹2,00,000 and long-term capital gain of ₹1,20,000, both with no exemption applicable. Brought forward: STCL of tax year 2024-25 ₹2,50,000; LTCL of tax year 2023-24 ₹1,00,000; LTCL of tax year 2025-26 ₹60,000. Returns of all earlier years were filed on time. Compute the net capital gain and the losses to carry forward.

Show the solution

Set off the brought-forward STCL first. Against STCG: ₹2,00,000 − ₹2,00,000 = nil. STCL left = ₹50,000.
STCL can also be set off against LTCG. LTCG becomes ₹1,20,000 − ₹50,000 = ₹70,000. STCL is now fully used.
LTCL can be set off only against LTCG. Take the earliest year first, the 2023-24 loss of ₹1,00,000. Only ₹70,000 of LTCG is left, so LTCG becomes nil.
Balance of the 2023-24 LTCL = ₹1,00,000 − ₹70,000 = ₹30,000. This can be used up to tax year 2031-32.
The 2025-26 LTCL of ₹60,000 is untouched and can be used up to tax year 2033-34.
Total LTCL to carry forward = ₹30,000 + ₹60,000 = ₹90,000.
Net capital gains for the year = nil.

Answer: Net capital gain is nil. Carry forward LTCL of ₹90,000 (₹30,000 of tax year 2023-24 and ₹60,000 of tax year 2025-26). No STCL is left.

Exam tips

In long problems, check the filing condition. If the question says a return was filed late, business loss and capital losses cannot be carried forward. Unabsorbed depreciation still can.
Always show the sequence in numbered lines: current depreciation, unabsorbed depreciation, then brought-forward business loss. Examiners give separate marks for each step.
Write the limit with the answer, such as 'carried forward up to tax year 2031-32' or 'indefinitely'. Use the words tax year, not assessment year.
For MCQs, look at which head the loss is being set off against. Business loss against salary, or LTCL against STCG, is almost always the wrong option.
State the set-off rule in one line before the working. Examiners can then award marks for the rule even if you slip on the figures.

Practice questions from Set-Off or Carry Forward and Set-off of Losses

Carry Forward of Business Losses, Depreciation and Capital Losses in other exams

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

Carry Forward of Business Losses, Depreciation and Capital Losses: frequently asked questions

For how many years can a business loss be carried forward?

A non-speculative business loss can be carried forward for eight tax years immediately after the tax year in which it arose. It can be set off only against business or profession income. The loss must have been determined in a return filed by the due date.

Is there a time limit for carrying forward unabsorbed depreciation?

No. Unabsorbed depreciation is carried forward indefinitely and treated as depreciation of the next year. It is first absorbed by business income, and any shortfall can be set off against income under any other head, including salary. The due-date return condition does not apply to it.

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

No. Long-term capital loss can be set off only against long-term capital gain. Short-term capital loss can be set off against both short-term and long-term capital gain. Both are carried forward for eight tax years.

Which is set off first, brought-forward business loss or unabsorbed depreciation?

Current-year depreciation is deducted first. Then the unabsorbed depreciation is set off, because it is treated as current-year depreciation. The brought-forward business loss comes after that. Within each type, the earliest year is set off first.

What happens if I file my return late?

A business loss or capital loss not determined in a return filed by the due date cannot be carried forward. Unabsorbed depreciation is not affected by this condition. File on time to protect your losses.