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

Loss from Specified Business: Set-Off and Carry Forward under Section 114

Updated 4 October 2026 · Fact-checked

A loss from a specified business is the loss left after the 100% deduction for capital expenditure. Under section 114, you can set it off only against profits of another specified business. Any unabsorbed amount is carried forward to later tax years with no time limit, and again set off only against specified business profits.

Understand Loss from Specified Business

Some businesses get a full deduction for capital expenditure to encourage investment. Examples are cold chains, warehousing, certain hotels, hospitals, affordable housing projects and pipelines. These are called specified businesses. The deduction is large, so it often creates a loss on paper even when the business earns well.

The law does not want this paper loss to wipe out your tax on ordinary business income. So section 114 ring-fences it. A loss from a specified business can be set off only against profits of a specified business. It cannot be set off against trading profit, salary, house property, capital gains or other sources.

The unabsorbed loss is carried forward to the following tax years. There is no time limit for this. In every later year it can be set off only against specified business profits.

The restriction works in one direction only. Your other losses, such as a normal business loss, can be set off against specified business profit. Only the specified business loss is restricted. Do not mix this up with a speculation loss. A speculation loss is also ring-fenced, but it is carried forward for only 4 years. A specified business loss is carried forward indefinitely.

Key rules to remember

Specified business loss: Loss = Profit before capital expenditure deduction - Deduction for capital expenditure - Other allowable deductions; Take the capital expenditure deduction first. Only then do you see whether there is a loss to ring-fence.
Current-year set-off rule: Specified business loss ≤ Profit from any other specified business (same tax year); The set-off is allowed only against profit from another specified business. It cannot go against any other income.
Carry forward rule: Unabsorbed loss → carried forward to next tax years, no time limit, set off only against specified business profit; Compare: speculation loss is carried forward for 4 tax years only.
One-way restriction: Other business losses → can be set off against specified business profit; specified business loss → cannot be set off against other business profit; Check which side the loss comes from before setting off.
Order of set-off in a later year: Current-year losses first, then brought-forward losses (earliest year first); This follows the general set-off sequence for business losses.

How to solve Loss from Specified Business questions

Use this method for any question on specified business losses. Keep specified business apart from all other income at every step.

1Identify whether the business is a specified business. Look for the investment-linked capital expenditure deduction (warehouse, cold chain, hotel, hospital, affordable housing and similar).
2Compute the profit of each specified business after the capital expenditure deduction. A negative figure is the loss.
3Set off the current-year loss of one specified business against the profit of another specified business in the same tax year.
4If a loss is still left, do not set it off against any other income. Carry the balance forward.
5In later years, first set off current-year losses of other businesses against specified business profit, then set off the brought-forward specified business loss.
6Whatever is still unabsorbed is carried forward again. There is no time limit.
7Keep the other business income separate. Compute it in full and add it to the total income without any deduction for the specified business loss.
8Write a closing note stating the loss carried forward and why it was not set off against other income.

Quickest way: Two-bucket method with MCQ elimination and a written format

When to use it: Use this for MCQs and for the written computation under time pressure.

Draw two buckets: 'Specified business' and 'Everything else'. Put each figure in its bucket.
A specified business loss can only go into the 'Specified business' bucket. Reject any MCQ option that sets it off against other business income, salary or capital gains.
If an option says the loss lapses after 8 years or 4 years, reject it. Specified business losses carry forward without a time limit.
If the question mentions a speculation loss as well, treat it as a third bucket. Its carry forward limit is 4 years.
For written answers, use a table with columns for Specified business A, Specified business B, Other business and Total. Use the rows: profit/loss, set-off, balance, carried forward. Each step earns marks.
Close with a one-line statement: 'Loss of ₹ __ is carried forward and can be set off only against specified business profit.'

Common mistakes in Loss from Specified Business

Setting off a specified business loss against trading or other business profit.
Students treat it like a normal business loss, which can be set off against other business income.
Fix: Remember that section 114 allows set-off only against specified business profit. Keep the two buckets separate.
Applying the 8-year limit to a specified business loss.
Students mix it up with normal business loss carry forward.
Fix: A specified business loss is carried forward indefinitely. The limit of 4 years applies to speculation loss.
Confusing specified business loss with speculation loss.
Both are ring-fenced and set off only against similar profits.
Fix: Speculation loss: set off only against speculation profit, carried forward for 4 years. Specified business loss: set off only against specified business profit, carried forward without limit.
Refusing to set off a normal business loss against specified business profit.
Students assume the ring-fence works both ways.
Fix: Only the specified business loss is restricted. A normal business loss can be set off against specified business profit.
Finding the loss before deducting capital expenditure.
Students look at operating profit and miss that the loss exists only after the deduction.
Fix: Always compute profit after the capital expenditure deduction. A loss may exist only because of that deduction.
Setting off brought-forward loss before current-year losses.
Students go by the order in which the figures are given.
Fix: Use current-year losses first, then brought-forward losses, earliest year first.

Worked examples

Example 1

Mr Rao has two specified businesses and a trading business. For the tax year 2026-27, his computation after the capital expenditure deduction is: Business A (warehouse) loss ₹4,00,000; Business B (hospital) profit ₹1,50,000; trading business profit ₹8,00,000. Compute his income from business and profession, and state the loss carried forward.

Show the solution

Identify the specified businesses: A and B. Trading is an ordinary business.
Business A shows a loss of ₹4,00,000 after the capital expenditure deduction.
Set off A's loss against B's profit, which is also a specified business: ₹4,00,000 - ₹1,50,000 = ₹2,50,000 unabsorbed.
B's profit becomes nil.
The balance ₹2,50,000 cannot be set off against the trading profit of ₹8,00,000. Section 114 restricts it to specified business profit.
Income from business and profession = Trading profit ₹8,00,000 + Specified business income nil = ₹8,00,000.

Answer: Income from business and profession is ₹8,00,000. A specified business loss of ₹2,50,000 is carried forward indefinitely and can be set off only against specified business profit.

Example 2

In the next tax year, Mr Rao's specified business shows a profit of ₹3,00,000 after the capital expenditure deduction. His trading business shows a loss of ₹1,00,000. He has income from other sources of ₹70,000. The brought-forward specified business loss is ₹2,50,000. Compute his total income and the loss to be carried forward.

Show the solution

Business income before set-off: specified business profit ₹3,00,000. The trading loss is ₹1,00,000.
Set off the current-year trading loss first. A normal business loss can be set off against specified business profit: ₹3,00,000 - ₹1,00,000 = ₹2,00,000.
Set off the brought-forward specified business loss against specified business profit: ₹2,00,000 - ₹2,00,000 = nil. The unabsorbed balance is ₹2,50,000 - ₹2,00,000 = ₹50,000.
Income from business and profession = nil.
The ₹50,000 balance cannot be set off against other sources income of ₹70,000.
Total income = Income from other sources ₹70,000.

Answer: Total income is ₹70,000. A specified business loss of ₹50,000 is carried forward to the next tax year, again only against specified business profit.

Exam tips

Read the question for the words 'specified business' or the type of business (hotel, warehouse, hospital, cold chain). Then apply section 114 at once.
In the written answer, cite section 114 and state the rule in one line. This earns marks for provision and conclusion.
In MCQs, check the carry forward period. 'Indefinitely' points to specified business loss. '4 years' points to speculation loss. '8 years' points to normal business loss.
Always show the loss carried forward separately at the end. Examiners look for it.
In multi-year problems, apply current-year set-off first, then brought-forward loss.

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

Loss from Specified Business in other exams

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

Loss from Specified Business: frequently asked questions

Can a specified business loss be set off against salary or house property income?

No. Under section 114, a specified business loss can be set off only against profits of a specified business. It cannot be set off against salary, house property, capital gains, other sources or any other business income.

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

It can be carried forward indefinitely. There is no limit of 4 or 8 years. In every later year, it can be set off only against specified business profit.

What is the difference between speculation loss and specified business loss?

Both are set off only against profits of their own kind. A speculation loss is set off against speculation profit and carried forward for 4 years. A specified business loss is set off against specified business profit and carried forward without a time limit.

Can a normal business loss be set off against specified business profit?

Yes. The restriction applies only to the specified business loss. Other business losses can be set off against profit from a specified business under the usual rules.