CMA Intermediate · Direct and Indirect Taxation

Set Off and Carry Forward of Losses for CMA Inter

Set off means adjusting a loss against income of the same tax year, first within the same head, then against other heads. Carry forward means moving the unabsorbed loss to later tax years. Under the Income-tax Act, 2025, sections 108 and 109 govern set off. Sections 111 to 115 govern carry forward of capital, business, speculation, specified business and race horse losses.

What this chapter covers

This chapter answers one question: when a source or head shows a loss, where can that loss be adjusted, and for how long can it wait? You solve it in two stages. First you set off the loss in the same tax year, within the same head (section 108) and then against other heads (section 109). Whatever is left may be carried forward to later tax years and set off under the rules for that type of loss.

The carry forward rules differ by loss type. Business loss (section 112) can be carried forward for up to eight tax years. Speculation loss (section 113), loss from the specified activity of owning and maintaining race horses (section 115) and capital loss (section 111) each have their own limits and their own allowed set off. Specified business loss (section 114) can be set off only against profits of another specified business. Section 114, as reproduced in the official text, does not state a carry forward period. Do not memorise it as a rule that the loss is unlimited. Check the latest Act and the ICMAI study material for the position before the exam. Section 121 adds a gate: a loss not determined in a return filed under section 263(1) cannot be carried forward and set off under section 111(1), 112(1), 113(2), 114(2) or 115(2).

This chapter sits between computation of income under each head and computation of total income. You cannot finish a total income question without it. Gross total income depends on what set off is allowed, and the answer also feeds the deductions that follow. Practise it together with the heads of income, especially business income and capital gains.

Loss questions appear in the numerical part of the Taxation paper, often as a computation of total income with several heads, a brought forward loss and a carry forward statement. The rules are short and rule-based, so well-prepared students can score full step marks. One wrong set off can disturb the whole answer, so the chapter rewards accuracy and a clean layout. It also supports MCQs, which test exact conditions such as the number of years and which loss can be set off against which income.

Set off and Carry Forward of Losses: topics in the order to study them

1Set Off of Losses: Inter-Source and Inter-Head RulesStart here because every other topic builds on how a loss is first adjusted in the same year under sections 108 and 109.
2Carry Forward and Set Off of Losses: General ConditionsLearn the general carry forward rule, the eight-year limit for business loss and the return condition in section 121 before the special losses.
3Speculation Business Losses (Section 113)This is the first special loss: set off only against speculation profits, with a four-year limit and a deemed speculation rule for companies.
4Specified Business Losses (Section 114)Study it after section 113 because the set off pattern is similar, but the business is defined by reference to section 46. Note that section 114, as reproduced, states no carry forward period, unlike section 113. Verify this point against the latest Act and ICMAI study material.
5Capital Losses and Race Horse Losses (Sections 111 and 115)Finish with capital loss and the race horse loss. Capital loss needs the head-wise rules and the short-term and long-term distinction in sections 108, 109 and 111. Section 115 covers the loss from the specified activity of owning and maintaining race horses, which is set off only against income from that activity.

How to prepare Set off and Carry Forward of Losses

Treat this chapter as a decision tree: identify the type of loss, then apply the same-year rule, then the carry forward rule.

Build a one-page table of loss types with three columns: what it can be set off against this year, what it can be set off against in later years, and the carry forward limit.
Learn the order of set off: same head first (section 108), then other heads (section 109), then carry forward.
Memorise the restrictions in section 109: business loss cannot be set off against salary, house property loss is set off up to ₹2,00,000 against other heads in the same tax year, and capital loss cannot be set off against other heads.
Learn the time limits exactly: eight tax years for business loss and capital loss, and four tax years for speculation loss and race horse loss. For specified business loss (section 114), note that the section as reproduced states no period. Verify it against the latest Act and ICMAI study material instead of assuming a rule.
Solve full total income problems with a brought forward loss. Use the same layout every time: current year set off, then brought forward set off, then the carry forward statement.
Finish with MCQs on conditions and exceptions, such as the section 121 return condition and the company rule for share trading in section 113.

Common mistakes in Set off and Carry Forward of Losses

Setting off a business loss against salary income.
Fix: Whenever you set off a business loss, check the head. Salary is excluded by section 109(1)(a).
Setting off a capital loss against other heads or setting off a long-term capital loss against a short-term gain.
Fix: Remember that capital loss stays within capital gains, and long-term loss goes only against long-term gains.
Mixing up the carry forward periods of four and eight tax years, or stating a period for specified business loss without checking.
Fix: Keep a table: business and capital loss, eight years; speculation and race horse loss, four years. For specified business loss (section 114), write what the section says and verify the position against the latest Act and ICMAI study material.
Ignoring the return condition and carrying forward a loss when no return was filed under section 263(1).
Fix: Read the facts for filing details and state in your answer that carry forward needs the loss to be determined in a return filed under section 263(1).
Setting off a speculation loss against normal business profit.
Fix: Set off a speculation loss only against speculation profits, and show it as a separate carry forward line if unabsorbed.
Not showing the working of set off and carry forward clearly.
Fix: Show each set off step with its section, then close with a carry forward statement by loss type and year to earn step marks.

Last-day revision: Set off and Carry Forward of Losses

Section 108 sets off a loss against other sources within the same head; capital gains follow separate rules in section 108(2). The restrictions on set off against other heads are in section 109.
Section 109: a business loss cannot be set off against salary income.
House property loss can be set off against income under other heads only up to ₹2,00,000 in the same tax year.
Capital loss cannot be set off against any other head.
A short-term capital loss can be set off against income from any other capital asset (short-term or long-term). A long-term capital loss can be set off only against income from any other long-term capital asset.
Business loss (not speculation) carries forward for at most eight tax years and sets off against business or profession profits.
Speculation loss sets off only against speculation profits and carries forward for at most four tax years.
Specified business loss under section 114 sets off only against profits of another specified business. The section as reproduced states no carry forward period, so verify the position against the latest Act and ICMAI study material.
Race horse loss under section 115 sets off only against income from that activity, for at most four tax years.
Carried forward capital loss can be used for at most eight tax years.
Section 121: a loss not determined in a return filed under section 263(1) cannot be carried forward and set off under section 111(1), 112(1), 113(2), 114(2) or 115(2).
A company that buys and sells shares of other companies is deemed to carry on speculation business to that extent, with the exceptions in section 113(6).

Set off and Carry Forward of Losses practice questions

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.

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 moves the loss left over to later tax years, where it can be set off under the rule for that loss type.

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

A business loss other than a speculation loss can be carried forward for up to eight tax years immediately after the tax year in which it was first computed (section 112). Speculation losses and race horse losses are limited to four tax years. Section 114, as reproduced, states no period for a specified business loss, so verify that point against the latest Act and ICMAI study material.

Can a loss under the head house property be set off against salary?

Yes, within a limit, and only in the same tax year. Under section 109, a house property loss can be set off against income under any other head only up to ₹2,00,000 for that tax year. The sections covered on this page do not deal with carrying forward any unabsorbed house property loss, so check the Act and ICMAI study material for that point.

Is filing a return necessary to carry forward a loss?

Yes. Under section 121, a loss that has not been determined in pursuance of a return filed under section 263(1) cannot be carried forward and set off under section 111(1), 112(1), 113(2), 114(2) or 115(2).