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

Intra-head and Inter-head Set-off of Losses

Updated 5 October 2026 · Fact-checked

Intra-head set-off adjusts a loss against other sources under the same head. Inter-head set-off adjusts the balance against other heads. Exceptions block it: speculation, specified business, long-term capital and race horse losses, and business loss against salary. House property loss against other heads is capped at ₹2,00,000 a year.

Understand Intra-head and Inter-head Set-off of Losses

Your total income is built head by head. Sometimes one source under a head makes a loss while another makes a profit. The law lets you net them off before you pay tax. This is the reason set-off exists: tax falls on your real net income, not on profits alone.

There are two stages, and the order matters. Intra-head set-off comes first. A loss from one source is set off against income from any other source under the same head. For example, a loss from one let-out house is set off against rent from another house. Business loss from one business is set off against profit from another business.

Inter-head set-off comes second. If a loss is still left after intra-head set-off, you set it off against income under other heads. For example, a leftover house property loss goes against salary. Always finish the intra-head step for every head before you start the inter-head step.

The law blocks set-off in some cases. Think of them as restricted pockets.

Speculation loss is set off only against speculation profit.
Specified business loss is set off only against specified business profit.
Race horse loss is set off only against race horse income.
A normal (non-speculation) business loss can be set off against speculation profit. The reverse is not allowed.
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 gains.
Business loss cannot be set off against salary. Capital loss cannot go against other heads.
House property loss can go against other heads only up to ₹2,00,000 in a tax year.

Winnings from lotteries, crossword puzzles, card games and other games, and betting are different. They are taxed on the gross amount, and no expense or loss is set off against them.

Whatever cannot be set off in the current year may be carried forward, subject to the carry forward rules. That is a separate topic. Here you only decide what can be adjusted in the current tax year, and in which order.

Key rules to remember

Order of set-off: Step 1: intra-head set-off → Step 2: inter-head set-off → Step 3: carry forward the balance; Current year losses are adjusted before brought forward losses. Always do intra-head for all heads first.
General intra-head rule: Loss from one source ≤ income from any other source under the same head; This is the general rule. Exceptions apply to speculation, specified business, capital gains and race horses.
Exceptions to intra-head set-off: Speculation loss → speculation profit only; Specified business loss → specified business profit only; Long-term capital loss → long-term capital gain only; Race horse loss → race horse income only; Short-term capital loss can be set off against both short-term and long-term capital gains. Non-speculation business loss can be set off against speculation profit, but not the other way round.
No set-off against winnings: Winnings from lotteries, crossword puzzles, card games and other games, and betting → taxed on the gross amount; no expense or loss is set off. Loss from an exempt source → nil set-off; There is no 'lottery loss' to set off. Do not claim any expense or loss against such winnings. A loss from an exempt source is ignored.
Inter-head exceptions: Non-speculation business loss ↛ salary; Capital loss ↛ other heads (only against capital gains, subject to the short-term/long-term rule); Race horse loss → race horse income only; Speculation and specified business loss ↛ other heads; Race horse loss can be set off only against race horse income. Non-speculation business loss (other than specified business loss) can be set off against house property, capital gains and other sources income, but not against salary or against winnings from lotteries, crosswords, card games and similar income.
House property loss limit: Set-off of house property loss against other heads ≤ ₹2,00,000 per tax year; The limit applies to the loss left after intra-head set-off. The excess is carried forward.

How to solve Intra-head and Inter-head Set-off of Losses questions

Use this method for any set-off question. It keeps you in the right order and earns step marks.

1Compute the income or loss of each source under each head separately. Show the working note for each.
2Intra-head step: for each head, net the loss of a source against income of other sources under the same head. Respect the exceptions (speculation, specified business, long-term capital loss, race horses).
3Write the net figure for each head. A head is now either positive, nil or a net loss.
4Inter-head step: take each net loss and set it off against positive heads. Skip heads it cannot touch: salary for business loss, and every other head for capital loss. A capital loss can be set off only against capital gains, subject to the short-term/long-term rule. Apply the ₹2,00,000 cap to house property loss.
5Where the question gives no choice of heads, set off against the heads that are allowed and state your assumption. Show the figures clearly.
6Add up the heads after set-off to get Gross Total Income. Do not deduct the deductions allowed from gross total income at this stage.
7List the balance of each unabsorbed loss separately, with its type, as the amount to be carried forward.

Quickest way: Three-column table method

When to use it: Use it for 5-to-10 mark computation questions and for MCQs on which loss can be set off against what.

Draw columns: Head, Income or loss before set-off, After intra-head, After inter-head. This table also earns step marks.
For MCQs, ask two questions about the loss. Is it speculation, specified business, long-term capital or race horse? Is it business loss against salary? A yes means restricted set-off. Also check whether the income is lottery, card-game or betting winnings: nothing is set off against it.
Remember the one-way rules. Short-term capital loss can be set off against long-term gain. Long-term loss cannot be set off against short-term gain. Non-speculation business loss can be set off against speculation profit, but not the reverse.
For house property loss against other heads, cap the set-off at ₹2,00,000. Cross out the rest and write it as carry forward.
In MCQs with no negative marking, eliminate options that set off a long-term capital loss against salary or a business loss against salary. Then pick from the rest.

Common mistakes in Intra-head and Inter-head Set-off of Losses

Setting off a long-term capital loss against short-term capital gain.
Students assume capital loss can be set off against any capital gain.
Fix: Remember the one-way rule: long-term loss only against long-term gain; short-term loss against both.
Setting off non-speculation business loss against salary.
Students remember that business loss can go against other heads and forget the salary exception.
Fix: Write 'salary: no' next to every business loss. Use house property, capital gains and other sources instead.
Setting off the full house property loss against other heads.
Students forget the cap or apply it before intra-head set-off.
Fix: First net all house properties. Then set off at most ₹2,00,000 against other heads. Carry forward the rest.
Setting off speculation loss against normal business profit.
Both are business income, so students treat them as one pool.
Fix: Speculation loss can only be set off against speculation profit. The reverse is allowed: normal business loss can be set off against speculation profit.
Doing inter-head set-off before intra-head set-off is complete.
Students rush to use a loss against the nearest big income.
Fix: Net every head first. Only the net loss of a head moves to other heads.
Deducting expenses or setting off any loss against winnings from lotteries, crosswords, card games and betting.
Students treat winnings like ordinary other-sources income.
Fix: Such winnings are taxed on the gross amount. No expense or loss is set off against them.

Worked examples

Example 1

For the tax year 2026-27, Mr Rao has: salary income ₹5,00,000; income from house property I ₹1,20,000; loss from house property II ₹(4,70,000); business income ₹3,00,000. Compute the gross total income after set-off and the loss to be carried forward.

Show the solution

Intra-head (house property): ₹1,20,000 − ₹4,70,000 = ₹(3,50,000) net loss.
Inter-head: the loss against other heads is capped at ₹2,00,000. Set off ₹2,00,000 against the other heads. The question gives no preference, so this is an assumption: adjust it against business income ₹3,00,000, which becomes ₹1,00,000. You could equally set it off against salary (salary would become ₹3,00,000 and business income would stay ₹3,00,000). The gross total income is the same ₹6,00,000 either way.
Carry forward the unabsorbed house property loss: ₹3,50,000 − ₹2,00,000 = ₹1,50,000.
Gross total income: salary ₹5,00,000 + house property ₹0 + business ₹1,00,000 = ₹6,00,000.

Answer: Gross total income is ₹6,00,000, whether the ₹2,00,000 is set off against salary or business income. House property loss of ₹1,50,000 is carried forward.

Example 2

For the tax year 2026-27, Ms Mehta has: salary ₹5,00,000; non-speculation business loss ₹(2,00,000); speculation business profit ₹1,00,000; short-term capital gain ₹80,000; long-term capital loss ₹(50,000); interest from bank (other sources) ₹30,000. Compute the gross total income and the losses to be carried forward.

Show the solution

Intra-head, business: the rules permit a non-speculation business loss to be set off against speculation profit. Set off the ₹2,00,000 loss against the speculation profit of ₹1,00,000, so speculation profit becomes nil. This leaves a non-speculation business loss of ₹1,00,000 to be set off against other heads.
Intra-head, capital gains: long-term capital loss ₹50,000 cannot be set off against short-term gain. Short-term gain stays ₹80,000. Long-term loss ₹50,000 stays unabsorbed.
Inter-head: the non-speculation business loss of ₹1,00,000 cannot be set off against salary. It can be set off against capital gains and other sources. The question does not say how to split it, so this is an assumption: set off ₹30,000 against interest and ₹70,000 against the short-term gain. The split is not unconstrained. The set-off against interest cannot exceed ₹30,000 and against short-term gain cannot exceed ₹80,000, and the two must total ₹1,00,000 (so interest set-off lies between ₹20,000 and ₹30,000). Any split that meets these limits gives the same gross total income of ₹5,10,000.
After set-off: salary ₹5,00,000; business ₹0; capital gains ₹10,000 (₹80,000 − ₹70,000); other sources ₹0.
Gross total income: ₹5,00,000 + ₹10,000 = ₹5,10,000.
Carry forward: long-term capital loss ₹50,000. The business loss of ₹1,00,000 is fully absorbed.

Answer: Gross total income is ₹5,10,000. The ₹2,00,000 non-speculation loss is first set off against ₹1,00,000 speculation profit, and the remaining ₹1,00,000 is set off against other sources (up to ₹30,000) and short-term gain (up to ₹80,000). The split between these two heads is an assumption, and any permitted split totalling ₹1,00,000 gives the same gross total income. Long-term capital loss of ₹50,000 is carried forward, as it cannot be set off against the short-term gain.

Exam tips

In a mixed computation question, state the intra-head result for every head before you start inter-head set-off. Examiners award marks for this separation.
Learn the exceptions as a list: speculation, specified business, long-term capital loss, race horses, and exempt income. Also remember that lottery, card-game and betting winnings get no expense or loss set off. Most MCQs test one of these.
Always check the tax year the question states. For house property loss, apply the ₹2,00,000 cap and write the excess as carry forward.
Write the reason in words next to each blocked set-off, for example 'long-term loss only against long-term gain'. This gets step marks even if your final figure slips.
Remember that set-off in this topic is only for current year losses. Do not mix in brought forward losses unless the question gives them, and then set off current year losses first.

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

Intra-head and Inter-head 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.

Intra-head and Inter-head Set-off of Losses: 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 other sources under the same head. Inter-head set-off adjusts the balance loss against income under other heads. Intra-head always comes first.

What is the limit for setting off house property loss against other heads?

The set-off of house property loss against income under other heads is limited to ₹2,00,000 in a tax year. The balance is carried forward.

Which losses cannot be set off against other heads of income?

Capital losses, speculation business loss, specified business loss, and race horse loss cannot be set off against other heads. Capital loss goes only against capital gains, and race horse loss only against race horse income. Non-speculation business loss (other than specified business loss) can be set off against house property, capital gains and other sources, but not against salary. Winnings from lotteries, card games, betting and similar sources are taxed on the gross amount, with no expense or loss set off.

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 gains. Long-term capital loss can be set off only against long-term capital gain.

Can non-speculation business loss be set off against speculation profit?

Yes. A normal business loss can be set off against speculation business profit. The reverse is not allowed: speculation loss can only be set off against speculation profit.