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

Concept of Set-off and Carry Forward of Losses

Updated 4 October 2026 · Fact-checked

Set-off means adjusting a loss against income of the same tax year, first within the same head and then against other heads. Carry forward means taking the unabsorbed loss to later tax years. Solve in that order, then check the exceptions, the eight-year limit and timely return filing.

Understand Concept of Set-off and Carry Forward of Losses

Tax is charged on the income of a tax year. If you lose money in one source and earn in another, taxing only the profit would be unfair. The Act therefore lets you adjust the loss against income. That adjustment is called set-off.

Set-off happens in two stages in the same tax year. Intra-head set-off adjusts a loss against income from another source under the same head. Inter-head set-off adjusts what remains against income under other heads. Some losses are not allowed to cross these lines. For example, a loss from speculation business can be set off only against speculation profit.

If the loss is still unabsorbed, the Act lets you carry it forward to later tax years and set it off against specified future income. Each loss has its own rules. Some can be carried forward for eight tax years, some for four, and some without any time limit. The period runs from the end of the tax year in which the loss was first computed.

Carry forward comes with conditions. For most losses, you must file the return of income by the due date. The main exceptions are house property loss and unabsorbed depreciation, which can be carried forward even if the return is late. Only the person who incurred the loss can carry it forward. A successor can carry it forward only in specific cases, such as succession in business, amalgamation or demerger, and only subject to the conditions of the Act.

The order matters. Set off current year losses first, within the head and then across heads. Only then bring in brought forward losses, earliest year first. Tax is computed on what is left, and whatever is still unabsorbed goes forward.

Key rules to remember

Order of adjustment: Intra-head set-off → Inter-head set-off → Brought forward losses → Carry forward of balance; Current year loss is always dealt with before brought forward loss.
Business income order: Current year depreciation → Unabsorbed depreciation → Brought forward business loss; Unabsorbed depreciation is treated as part of the current year depreciation of the next year, so it is set off before the brought forward business loss.
Eight-year losses: House property loss, non-speculative business loss and capital loss: carry forward up to 8 tax years; Counted from the end of the tax year in which the loss was first computed. For capital loss, the eight years apply to both short-term and long-term capital loss, but each is set off as per its own rule.
Four-year losses: Speculation business loss and loss from owning and maintaining race horses: carry forward up to 4 tax years; Each can be set off only against income of the same kind.
No time limit: Unabsorbed depreciation and loss from specified business: carry forward indefinitely; Specified business loss is set off only against specified business profit.
Where brought forward losses can be set off: House property loss → house property income. Business loss → business profits. Short-term capital loss → short-term or long-term capital gain. Long-term capital loss → long-term capital gain only.; Brought forward non-speculative business loss can be set off only against business income, not against salary or other heads. Brought forward long-term capital loss can be set off only against long-term capital gains.
Capital loss rule: Short-term capital loss → short-term or long-term gain. Long-term capital loss → long-term gain only.; Capital loss can never be set off against income under other heads.
House property loss inter-head limit: Maximum set-off against other heads in one tax year = ₹2,00,000; The balance is carried forward. Check whether the question applies a regime that restricts inter-head set-off of this loss.
Return filing condition: Return filed by the due date → carry forward allowed for business, speculation, specified business, capital and race horse losses; Not required for house property loss and unabsorbed depreciation.

How to solve Concept of Set-off and Carry Forward of Losses questions

Use this method for any question that gives income and losses under several heads and asks for total income or carry forward.

1List every head and source with its current year income or loss. Note the status of the assessee and whether the return is filed on time.
2Do intra-head set-off. Set off each loss against income of the same head, but keep speculation, specified business, long-term capital loss, race horse and similar restricted items apart.
3Do inter-head set-off. Set off the remaining losses against other heads, respecting the exceptions: no capital loss against other heads, no business loss against salary, and the house property limit of ₹2,00,000.
4Bring in brought forward losses. Take earlier years first, and set each only against the income it is allowed against. In business, use current year depreciation first, then unabsorbed depreciation, then brought forward business loss.
5Compute gross total income after all adjustments. Show each head with its balance.
6Work out what remains unabsorbed for each loss. Check the time limit and whether the return was filed on time. Drop any loss that is not eligible to be carried forward.
7Write the carry forward statement with the amount, the type of loss and the future income it can be set off against.

Quickest way: Table-first method for MCQs and written answers

When to use it: Use this when you have limited time and several losses in the question.

Draw a small table with columns: head, current income or loss, set-off done, balance, carry forward. This also earns step marks in written answers.
For MCQs, scan for the trap first: late return, speculation or specified business, capital loss against salary, house property over ₹2,00,000, or a loss older than eight years. Eliminate options that break these.
Remember the shortcut for restricted losses: speculation, specified business, long-term capital loss and race horse losses can only be set off against the same kind of income.
Remember the shortcut for time limits: eight years for house property, business and capital; four years for speculation and race horse; unlimited for unabsorbed depreciation and specified business.
In written answers, state the rule in one line before each adjustment, then show the figure. Finish with a clear carry forward statement.

Common mistakes in Concept of Set-off and Carry Forward of Losses

Setting off non-speculative business loss against salary.
Students remember that inter-head set-off exists and forget the exceptions.
Fix: Business loss can be set off against other heads but never against salary income. Mark salary as closed to business loss.
Setting off capital loss against business or other income.
Students treat all losses as freely adjustable across heads.
Fix: Capital loss is set off only against capital gains. Long-term capital loss can be set off only against long-term gain, while short-term capital loss can be set off against either short-term or long-term gain. This applies to brought forward capital loss too.
Carrying forward a business loss when the return was filed late.
The due date condition is missed in the question facts.
Fix: Check the filing date first. Without a timely return, business, speculation, specified business, capital and race horse losses cannot be carried forward. House property loss and unabsorbed depreciation are the exceptions.
Setting off the entire house property loss against salary.
Students forget the ₹2,00,000 inter-head cap.
Fix: Cap the inter-head set-off at ₹2,00,000 and carry forward the balance for up to eight tax years.
Using brought forward business loss before unabsorbed depreciation.
Students set off the oldest items first in all cases, or treat unabsorbed depreciation as the last item.
Fix: Within business, current year depreciation comes first. Unabsorbed depreciation is treated as current year depreciation of the next year, so it comes next, and brought forward business loss comes after it.
Counting the eight years from the wrong year, or carrying forward beyond the limit.
Students count from the year the loss was set off or from the year of the return.
Fix: Count from the end of the tax year in which the loss was first computed. A loss unabsorbed after eight years lapses.

Worked examples

Example 1

Ravi, a resident individual, files his return on time for the tax year 2026-27. His income and loss: Salary ₹6,00,000; loss from let-out house property ₹2,50,000; profit from business A ₹1,00,000; loss from business B (non-speculative) ₹1,80,000; short-term capital gain ₹40,000. Compute his gross total income and the losses carried forward. Assume set-off of house property loss against other heads is allowed.

Show the solution

Intra-head, business: ₹1,00,000 − ₹1,80,000 = loss of ₹80,000 under business.
Inter-head, house property loss first: the loss is ₹2,50,000. Its set-off against all other heads together is capped at ₹2,00,000 in aggregate. Business loss cannot use salary, so apply this ₹2,00,000 against salary.
Salary after set-off = ₹6,00,000 − ₹2,00,000 = ₹4,00,000.
Balance house property loss = ₹2,50,000 − ₹2,00,000 = ₹50,000, to be carried forward against house property income.
Inter-head, business loss second: it cannot be set off against salary. It can be set off against short-term capital gain ₹40,000. Balance business loss = ₹80,000 − ₹40,000 = ₹40,000.
Capital gains after set-off = ₹40,000 − ₹40,000 = nil.
Gross total income = ₹4,00,000 (salary) + nil (business) + nil (capital gains) + nil (house property) = ₹4,00,000.
Carry forward: house property loss ₹50,000 and business loss ₹40,000. Both are allowed because the return is filed on time.

Answer: Gross total income = ₹4,00,000. Carry forward: house property loss ₹50,000 (against house property income) and business loss ₹40,000 (against business income, up to eight tax years).

Example 2

Meena has profits from a business before depreciation of ₹2,00,000 for the tax year 2026-27. Current year depreciation is ₹1,20,000. She has a brought forward non-speculative business loss of ₹1,50,000 (within eight years) and brought forward unabsorbed depreciation of ₹90,000. She has no other income and filed her return on time. Compute her business income and the balance carried forward.

Show the solution

Business profit after current year depreciation = ₹2,00,000 − ₹1,20,000 = ₹80,000.
Next, set off brought forward unabsorbed depreciation, which is treated as current year depreciation: ₹80,000 of the ₹90,000 is set off. Income becomes nil.
Balance unabsorbed depreciation = ₹90,000 − ₹80,000 = ₹10,000.
Brought forward business loss of ₹1,50,000 cannot be set off, because business income is already nil and she has no other income.
Both balances are carried forward. The business loss goes forward within its eight-year period. Unabsorbed depreciation has no time limit.

Answer: Business income = nil. Carry forward: business loss ₹1,50,000 and unabsorbed depreciation ₹10,000.

Exam tips

Read the facts for the return filing date before touching the numbers. A late return changes the carry forward answer.
Always show the order: intra-head, inter-head, brought forward, carry forward. Examiners give marks for the sequence as well as the figures.
In MCQs, look for restricted items such as speculation, specified business, lottery winnings and capital losses. These are the usual traps.
Write the rule in a short line before each set-off in a descriptive answer, for example 'business loss cannot be set off against salary'.
Finish every answer with a carry forward statement that gives the amount and the income it can be set off against.

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

Concept of Set-off and Carry Forward 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.

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

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

Set-off is the adjustment of a loss against income of the same tax year. Carry forward is taking the unabsorbed loss to later tax years. You always try set-off first, and carry forward only the balance.

For how many years can losses be carried forward?

House property loss, non-speculative business loss and capital loss can be carried forward for up to eight tax years. Speculation business loss and race horse loss can be carried forward for up to four tax years. Unabsorbed depreciation and loss from specified business can be carried forward without a time limit.

Is filing the return on time compulsory to carry forward a loss?

For most losses, yes. This covers business loss, speculation loss, specified business loss, capital loss and race horse loss. House property loss and unabsorbed depreciation can be carried forward even if the return is filed late.

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 can be set off only against long-term gains, while a short-term capital loss can be set off against both short-term and long-term gains.