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

Set-off and Carry Forward Problems and Special Cases

Updated 4 October 2026 · Fact-checked

Set-off and carry forward problems ask you to adjust losses in a fixed order. First set off current-year losses within a head, then across heads, then brought-forward losses only against the income they are allowed against. Carry forward what is left with its time limit. Watch the special cases: change in a firm's constitution and spouse clubbing.

Understand Set-off and Carry Forward Problems and Special Cases

A loss problem is a sorting exercise. You have incomes and losses under different heads, and each loss has its own rule about where it may be absorbed and how long it can wait. Your job is to apply those rules in the right order and show the result clearly.

The order never changes. Step one is intra-head set-off: a loss from one source against income from another source of the same head. Step two is inter-head set-off: any loss still left goes against income of other heads. Step three is brought-forward losses, which go only against the income the law allows. Step four is carrying forward whatever remains.

Some losses are ring-fenced. Speculation loss goes only against speculation profit. Specified business loss goes only against specified business profit. Long-term capital loss goes only against long-term capital gain. Short-term capital loss can go against both short-term and long-term gain. Capital loss never goes against other heads. Non-speculative business loss cannot be set off against salary. House property loss can be set off against other heads only up to ₹2,00,000 in a year, and not at all under the concessional regime, where it is carried forward instead.

Two special cases appear often. First, when a partner retires or dies, the firm cannot carry forward the part of its business loss of the earlier year that belongs to that partner. This rule is for retirement or death only. A mere change in the profit-sharing ratio does not trigger it. Unabsorbed depreciation is not cut. Second, when clubbing or deemed ownership brings a spouse's source into your income, income and loss from that source are both treated as yours. The spouse's own sources, income and losses stay with the spouse.

Finally, remember the filing condition. To carry forward business, speculation, specified business, capital and race horse losses, you must have filed the return of that year on time. House property loss and unabsorbed depreciation do not need this.

Key rules to remember

Order of set-off: Current-year intra-head → current-year inter-head → brought-forward losses → carry forward; Never set off brought-forward losses before current-year losses are fully dealt with.
House property loss: Inter-head set-off in a year ≤ ₹2,00,000; balance carried forward 8 years, against house property income only; Under the concessional regime, inter-head set-off is not allowed, so the whole loss is carried forward.
Non-speculative business loss: Current year: against any head except salary. Carried forward: 8 years, against business income only; Needs a timely return for the loss year.
Unabsorbed depreciation: Set off after brought-forward business loss; against any head except salary; carried forward without time limit; No timely return needed. Current-year depreciation is deducted first.
Speculation loss: Against speculation profit only; carried forward 4 years; Cannot be set off against non-speculative business income.
Specified business loss: Against specified business profit only; carried forward without time limit; Applies to the specified businesses with capital-linked deductions.
Capital losses: Short-term loss: against short-term or long-term gain. Long-term loss: against long-term gain only. Carry forward 8 years; Capital loss is never set off against other heads. Timely return needed.
Race horse loss: Against income from owning and maintaining race horses only; carried forward 4 years; Treat it as a separate ring-fenced pool.
Retirement or death of a partner: Earlier year's business loss carried forward by the firm = Earlier year's loss − Retired or deceased partner's share (profit-sharing ratio × that loss); Applies only on retirement or death of a partner, to the loss of the earlier year. It does not apply when only the partners' ratio changes. Unabsorbed depreciation is not reduced.
Clubbed or deemed-owned source: Income or loss of that source is taken in the transferor's computation under its own head; Set off or carry forward then follows that head's rules in the transferor's hands.

How to solve Set-off and Carry Forward Problems and Special Cases questions

Use the same sequence for every question. Show each stage as its own line so you earn step marks even if one figure goes wrong.

1Note the regime and the tax year. If inter-head set-off of house property loss is not allowed under the regime, say so and carry the loss forward.
2Compute each head's income source by source. Keep speculation, specified business, race horse, short-term and long-term capital items in separate lines.
3Do intra-head set-off. Apply the ring-fencing rules and state which losses cannot be set off.
4Do inter-head set-off with current-year losses. Respect the ₹2,00,000 cap on house property loss and the rule that business loss cannot go against salary. Capital loss never crosses heads.
5Apply brought-forward losses in order: house property loss, business loss, then unabsorbed depreciation, each only against permitted income. Check the 8-year and 4-year limits.
6Apply special cases: if a partner has retired or died, remove that partner's share of the firm's earlier business loss; take clubbed or deemed-owned income or loss in the transferor's hands.
7Write the Gross Total Income and a carry-forward statement listing each loss with its amount and the years left.
8Check that every loss absorbed was allowed and that nothing was set off twice.

Quickest way: Loss grid method

When to use it: Use it in any computation with three or more losses, either in the written answer or when the MCQ gives several figures.

Draw a small grid with the heads and ring-fenced pools as columns and Current, Brought-forward and Carry-forward as rows.
Fill in all incomes and losses first. Do no set-off until the grid is complete.
Cross out impossible set-offs: speculation against normal business, capital loss against other heads, business loss against salary.
Absorb current-year losses first, left to right, then the brought-forward ones.
For MCQs, test the options for forbidden set-offs. An option that sets off long-term capital loss against short-term gain, or business loss against salary, is wrong.
In the written answer, show the grid as lines of working and end with the carry-forward statement. Keep the layout simple so the examiner can follow it.

Common mistakes in Set-off and Carry Forward Problems and Special Cases

Setting off a business loss against salary
Students remember that inter-head set-off is allowed and forget the exception for salary.
Fix: Write 'except salary' beside every business loss and unabsorbed depreciation entry in your grid.
Applying brought-forward losses before current-year losses
The brought-forward figure is given first in the question, so students use it first.
Fix: Always finish current-year intra-head and inter-head set-off, then bring in earlier losses.
Setting off the entire house property loss against other heads
Students forget the ₹2,00,000 cap, or the regime restriction.
Fix: Write the cap as the first line of the house property working and carry the balance forward for 8 years.
Reducing unabsorbed depreciation when a partner retires or dies
Students apply the retired partner's share rule to every loss.
Fix: Apply the share cut only to the earlier year's business loss. Unabsorbed depreciation continues in full.
Applying the retired partner's share cut when only the profit-sharing ratio changes
Students treat every change in the firm's constitution as a retirement.
Fix: Use the cut only when a partner retires or dies. If the ratio alone changes, no part of the loss is removed under this rule.
Taking the spouse's own loss against clubbed income
Students treat the husband and wife as one assessee after clubbing.
Fix: Club only the specific source covered by the provision. The spouse's own sources, income and losses stay with the spouse.
Carrying forward a loss when the return was filed late
The late filing date is buried in the question.
Fix: Check the filing date for every loss except house property loss and unabsorbed depreciation. A business, speculation, capital or similar loss is lost if the return was late.

Worked examples

Example 1

Mr. A, a resident individual, opts for the regime that allows inter-head set-off of house property loss. For tax year 2026-27 his figures are: salary ₹4,00,000; house property loss ₹2,60,000; business A profit ₹1,10,000; business B (non-speculative) loss ₹1,40,000; speculation loss ₹30,000; short-term capital gain on gold ₹50,000; interest income ₹30,000. Brought forward from earlier years (returns filed on time): business loss ₹60,000, unabsorbed depreciation ₹25,000, long-term capital loss ₹20,000. Compute Gross Total Income and the losses carried forward.

Show the solution

Intra-head, business: ₹1,10,000 − ₹1,40,000 = loss of ₹30,000 from non-speculative business.
The speculation loss of ₹30,000 cannot be set off against this or any other income this year. It is carried forward for 4 years.
Inter-head, house property: the loss is ₹2,60,000, but only ₹2,00,000 can be set off against other heads. Set it off against salary: ₹4,00,000 − ₹2,00,000 = ₹2,00,000. The balance ₹60,000 is carried forward for 8 years, against house property income only.
Inter-head, business: the non-speculative loss of ₹30,000 cannot go against salary. Set it off against short-term capital gain: ₹50,000 − ₹30,000 = ₹20,000.
Brought-forward business loss of ₹60,000 can be set off only against business income. There is none this year, so it is carried forward.
Unabsorbed depreciation of ₹25,000 can be set off against any head except salary. Short-term capital gain ₹20,000 goes to nil, and the balance ₹5,000 is set off against interest: ₹30,000 − ₹5,000 = ₹25,000.
Brought-forward long-term capital loss of ₹20,000 can go only against long-term capital gain. There is none, so it is carried forward.
Gross Total Income = salary ₹2,00,000 + capital gains nil + other sources ₹25,000 = ₹2,25,000.

Answer: Gross Total Income = ₹2,25,000. Carried forward: house property loss ₹60,000 (8 years); business loss ₹60,000; speculation loss ₹30,000 (4 years); long-term capital loss ₹20,000. Unabsorbed depreciation is fully absorbed.

Example 2

(a) Firm ABC has partners A, B and C sharing profits and losses 2:2:1. It has a brought-forward business loss of ₹5,00,000 (return filed on time) and unabsorbed depreciation of ₹1,00,000. C retires during the year. The firm's business income for the year, before brought-forward losses and after current-year depreciation, is ₹3,50,000. Compute the firm's business income and the carry forward. (b) Mr. K has salary of ₹6,00,000. He gifted a let-out house to his wife without consideration, and the house shows a loss of ₹90,000. His wife has her own business profit of ₹1,50,000. Find Mr. K's income and his wife's business income.

Show the solution

(a) C's share of the loss = 1/5 × ₹5,00,000 = ₹1,00,000. This part cannot be carried forward by the firm because C has retired.
(a) Business loss available for set-off = ₹5,00,000 − ₹1,00,000 = ₹4,00,000.
(a) Order: the brought-forward business loss is set off first. Unabsorbed depreciation is set off only against any income left after that.
(a) Set off business loss against current business income: ₹3,50,000 − ₹3,50,000 = nil. Business loss still to carry forward = ₹4,00,000 − ₹3,50,000 = ₹50,000.
(a) No income is left, so unabsorbed depreciation of ₹1,00,000 is not set off. It is not affected by C's retirement and is carried forward in full.
(b) Because the house was transferred to the wife without consideration, Mr. K is treated as its owner. The house property loss of ₹90,000 is therefore computed in his hands.
(b) This loss is within the ₹2,00,000 limit, so it can be set off against his salary: ₹6,00,000 − ₹90,000 = ₹5,10,000.
(b) The wife's business profit of ₹1,50,000 is her own source. It is not affected by the house property loss and is not reduced.

Answer: (a) Firm's business income = nil; business loss carried forward = ₹50,000; unabsorbed depreciation carried forward = ₹1,00,000. (b) Mr. K's income after set-off = ₹5,10,000; wife's business income = ₹1,50,000.

Exam tips

Write the regime and the filing assumption in your first line. It shows the examiner you know which rules apply.
Always end with a carry-forward statement listing each loss, its amount and the years left. It is often a separate step mark.
Cite the reason for each refusal in a few words, for example 'speculation loss: only against speculation profit'. This earns marks even if the figure is wrong.
In MCQs, look for the single forbidden set-off in each wrong option. Check salary, capital loss, long-term against short-term, and the house property cap.
In firm questions, check first whether a partner has retired or died. If so, compute that partner's share of the earlier year's business loss only, not the depreciation. Set off business loss first, then unabsorbed depreciation.

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

Set-off and Carry Forward Problems and Special Cases 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 and Carry Forward Problems and Special Cases: frequently asked questions

Can a business loss be set off against salary?

No. A non-speculative business loss can be set off in the same year against income of other heads, but never against salary. A brought-forward business loss goes only against business income.

In what order do I set off brought-forward losses?

Set off current-year losses first. Then take brought-forward house property loss against house property income, brought-forward business loss against business income, and unabsorbed depreciation against any head except salary. The ring-fenced losses go only against their own income.

What happens to a firm's loss when a partner retires?

When a partner retires or dies, the firm can carry forward and set off the earlier year's business loss only to the extent that it is not that partner's share. That share is worked out at the profit-sharing ratio. Unabsorbed depreciation is not reduced, and a mere change in the ratio does not trigger this cut.

Is a timely return needed to carry forward every loss?

No. It is needed for business, speculation, specified business, capital and race horse losses. House property loss and unabsorbed depreciation can be carried forward even if the return was filed late.