Carry Forward and Set Off of Losses: General Conditions

Understand Carry Forward and Set Off of Losses: General Conditions

Key rules to remember

House property loss: time limit

Carry forward ≤ 8 tax years immediately after the tax year of first computation (section 110)

Set off only against income from house property. Any unabsorbed balance moves ahead each year till the eighth year ends.

House property loss: what can be carried forward

Loss not wholly set off under section 109 → carried to the next tax year

Only the part left after inter-head set off in the current year is carried forward.

Business loss: carry forward and set off

Carried forward and set off under section 112; set off only against business or profession income

Take the time limit and any condition from section 112 itself. Speculation and specified business losses follow their own sections.

Unabsorbed depreciation

No time limit; treated as current year depreciation of the later year

Because it is treated as current year depreciation, it comes before brought forward business loss.

Order of set off in a later year

Current year depreciation → unabsorbed depreciation (treated as current year depreciation) → brought forward business loss

Within brought forward business losses, the earliest year's loss is set off first.

Section 117: amalgamation of banking companies and similar entities

Accumulated loss and unabsorbed depreciation are deemed the successor's for the year the scheme came into force; for schemes on or after 1 April 2025, eight-year count runs from the original predecessor (section 117(2))

Covers banking companies, corresponding new banks and Government general insurance companies in the listed cases. Accumulated loss means business loss, excluding speculation loss.

Section 118: co-operative banks

Accumulated loss and unabsorbed depreciation pass to the successor (amalgamation) or the resulting co-operative bank (demerger) if section 118(3) conditions are met

The predecessor must have done banking business for three or more years. The successor must hold at least three-fourths of the book value of fixed assets and continue the business for a minimum of five years. If conditions fail, the set off is deemed income of the successor under section 118(5).

How to solve Carry Forward and Set Off of Losses: General Conditions questions

1. 1List each loss by head and by the tax year in which it arose. Keep each year's loss separate.
2. 2Apply current-year set off first: inter-source within the head, then inter-head under section 109, as permitted. Only the unabsorbed balance goes forward.
3. 3Check the conditions for each loss. House property loss under section 110 has an eight-year limit and no filing condition. For business loss, check the question and section 112 for any condition.
4. 4Check the time limit. Count eight tax years from the year of first computation for house property loss. For business loss use the limit in section 112. Unabsorbed depreciation has no limit. For a successor under section 117(2), count from the original predecessor.
5. 5In the later year, compute income head by head before any brought forward set off.
6. 6Set off in this order: current year depreciation, then unabsorbed depreciation (treated as current year depreciation), then brought forward business loss. Within business losses, the oldest loss goes first.
7. 7Restrict each loss to its allowed income. House property loss goes only against house property income. Business loss goes only against business income.
8. 8Write the closing balance of each loss to carry forward, with the last year it can be used.

Quickest way: Three-column loss tracker

Common mistakes in Carry Forward and Set Off of Losses: General Conditions

• Setting off brought forward house property loss against salary or business income.

  Students remember that current-year house property loss can go against other heads and assume the same for brought forward loss.

  Fix: Section 110 allows carried forward house property loss only against income from house property. Inter-head set off is only for the current year under section 109.

• Stating a time limit or filing condition for business loss from memory without checking section 112.

  Students carry the rules of one loss over to another.

  Fix: Quote only the conditions you can tie to section 112 or to the facts in the question.

• Denying carry forward of house property loss because of a late return.

  Students over-apply a filing condition to every loss.

  Fix: Section 110 sets no filing condition. Do not add one that the section does not state.

• Putting an eight-year limit on unabsorbed depreciation.

  Students group it with business loss because both relate to business.

  Fix: Unabsorbed depreciation has no time limit. Remember it as the loss that never expires.

• Counting eight years from the year the loss was set off or carried over to a successor.

  Students start counting from the year of takeover or first use.

  Fix: Count from the tax year in which the loss was first computed. Section 117(2) says so for successors, for schemes brought into force on or after 1 April 2025.

• Setting off brought forward business loss before unabsorbed depreciation, or against salary.

  Students set off in any order or against any income.

  Fix: Business loss goes only against business income. Follow the order: current year depreciation, then unabsorbed depreciation, then brought forward business loss.

Worked examples