Direct and Indirect Taxation · Set off and Carry Forward of Losses

Set Off of Losses: Inter-Source and Inter-Head Rules

Updated 10 October 2026 · Fact-checked

Set off means adjusting a loss against income in the same tax year. First set off the loss against other sources under the same head (section 108). Then set off the balance against other heads (section 109), except salary for business loss, capital gains losses, and house property beyond ₹2,00,000. Unabsorbed loss is carried forward.

Understand Set Off of Losses: Inter-Source and Inter-Head Rules

A loss arises when the computation of a source under a head gives a negative figure. The Act lets you reduce your other income by that loss in the same tax year. This is called set off. It works in two stages.

Stage 1 is inter-source (intra-head) set off under section 108(1). If the net result from one source under a head, other than Capital gains, is a loss, you set it off against income from any other source under the same head. Example: loss from one shop against profit from another business, both under business income. Unless the Act provides otherwise, this is allowed.

Stage 2 is inter-head set off under section 109(1). If a head (other than Capital gains) still shows a loss after stage 1, you set it off against income under any other head for that tax year, including Capital gains. Two conditions apply. Business loss cannot be set off against Salaries. House property loss can be set off against other heads only up to ₹2,00,000.

Capital gains have their own rules. Under section 108(2), a short-term capital loss is set off against income from any other capital asset, short-term or long-term. A long-term capital loss is set off only against long-term capital gains. Under section 109(2), a capital loss cannot be set off against any other head.

Some losses are ring-fenced and can be set off only against the same kind of income: speculation loss (section 113), specified business loss (section 114), and loss from owning and maintaining race horses (section 115). Whatever is not absorbed is carried forward under sections 110 to 115, with their own time limits. Also, under section 120, no loss can be set off against undisclosed income found in search, requisition or survey cases.

Key rules to remember

Inter-source set off: Loss from one source ⇒ set off against income from other sources under the same head (Section 108(1)); Applies to all heads except Capital gains, unless the Act provides otherwise.
Inter-head set off: Loss under a head (other than Capital gains) ⇒ set off against income under any other head, including Capital gains (Section 109(1)); Done only after inter-source set off, in the same tax year.
Business loss and Salaries: Business or profession loss ⇏ Salaries (Section 109(1)(a)); It can be set off against house property, capital gains and other sources income.
House property loss cap: Set off against other heads ≤ ₹2,00,000 (Section 109(1)(b)); The balance is carried forward under section 110 for up to eight tax years, against house property income only.
Capital loss set off: STCL ⇒ any capital gain (ST or LT); LTCL ⇒ LT capital gain only (Section 108(2)); Capital loss cannot be set off against any other head (Section 109(2)).
Ring-fenced losses: Speculation loss ⇒ speculation profit only (s.113); specified business loss ⇒ specified business profit only (s.114); race horse loss ⇒ race horse income only (s.115); Unabsorbed amounts are carried forward; s.113 and s.115 allow four tax years.
Undisclosed income: No set off of any loss or unabsorbed depreciation against undisclosed income found in search, requisition or survey (Section 120); Applies to survey other than under section 253(4).

How to solve Set Off of Losses: Inter-Source and Inter-Head Rules questions

Work head by head, then combine. Always apply the stages in the order below so you do not misapply a restriction.

1Compute the result of each source under each head separately, showing profit or loss.
2Identify ring-fenced losses (speculation, specified business, race horses) and set them off only against the same type of income.
3Do inter-source set off within each head (section 108(1)). For Capital gains, set off STCL against any capital gain and LTCL against LTCG only.
4Find the net figure of each head. Mark which heads are positive and which are negative.
5Set off negative heads (other than Capital gains) against positive heads under section 109, respecting the rules: business loss not against Salaries; house property loss capped at ₹2,00,000.
6Never set off a capital loss against another head.
7Add the remaining positive heads to get gross total income. Carry forward unabsorbed losses with the relevant section and time limit.
8Write the final table: head, income, loss set off, balance carried forward.

Quickest way: Three-filter check

When to use it: Use when the question has many sources and heads and you have limited time.

Filter 1: Circle ring-fenced losses (speculation, specified business, race horse, capital loss). These stay in their own pocket.
Filter 2: Net each head within itself. Set off STCL before LTCL balance is considered, but LTCL only against LTCG.
Filter 3: Apply the two inter-head blocks: business loss not against Salaries; house property loss limit ₹2,00,000. Then add up and show carry forward.

Common mistakes in Set Off of Losses: Inter-Source and Inter-Head Rules

Setting off a business loss against salary income.
Students remember that inter-head set off is allowed and forget the exception.
Fix: Remember section 109(1)(a). Business loss can go against house property, capital gains and other sources, but never Salaries.
Setting off the whole house property loss against other heads.
The ₹2,00,000 cap is missed when the loss is large.
Fix: Set off at most ₹2,00,000 under section 109(1)(b). Carry forward the rest under section 110 against house property income only.
Setting off a long-term capital loss against short-term capital gain.
Students assume the rule works both ways.
Fix: STCL can absorb any capital gain. LTCL can absorb only LTCG (section 108(2)).
Setting off a capital loss against income of another head.
Students apply the general inter-head rule to every loss.
Fix: Section 109(2) bars it. Capital loss is carried forward under section 111 and used only against capital gains.
Setting off speculation loss against normal business profit.
Both are business income, so the loss looks like the same source.
Fix: Section 113(1) allows speculation loss only against speculation profit. Carry forward the balance for up to four tax years.
Skipping inter-source set off and going straight to inter-head.
Students net everything in one step.
Fix: Always net within the head first (section 108), then across heads (section 109).

Worked examples

Example 1

For the tax year 2026-27, Mr. Rakesh Mehta has: salary ₹6,00,000; loss from house property ₹3,50,000; business A profit ₹2,00,000; business B loss ₹4,50,000; interest from bank ₹40,000. Compute gross total income and loss carried forward.

Show the solution

Business head: ₹2,00,000 − ₹4,50,000 = loss ₹2,50,000 after inter-source set off (section 108(1)).
House property loss ₹3,50,000: set off against other heads is capped at ₹2,00,000 (section 109(1)(b)). Balance ₹1,50,000 is carried forward under section 110.
Set off the house property loss ₹2,00,000 against positive heads. Positive heads are salary ₹6,00,000 and other sources ₹40,000.
Business loss ₹2,50,000 cannot be set off against Salaries. Set it off against other sources ₹40,000 first. Balance business loss ₹2,10,000.
Remaining house property set off of ₹2,00,000 now goes against salary: ₹6,00,000 − ₹2,00,000 = ₹4,00,000.
The business loss balance ₹2,10,000 has no other eligible income this year. Carry forward under section 112.
Gross total income = Salary ₹4,00,000 + Other sources ₹0 = ₹4,00,000.

Answer: Gross total income ₹4,00,000. Carried forward: house property loss ₹1,50,000 (section 110) and business loss ₹2,10,000 (section 112).

Example 2

Ms. Anita Rao has, for the tax year 2026-27: short-term capital loss ₹90,000; long-term capital gain ₹1,40,000; speculation loss ₹30,000; non-speculative business profit ₹1,10,000; income from other sources ₹20,000. Compute the income after set off.

Show the solution

Short-term capital loss ₹90,000 can be set off against any capital gain (section 108(2)(a)). Set it off against LTCG: ₹1,40,000 − ₹90,000 = ₹50,000 LTCG.
Speculation loss ₹30,000 can be set off only against speculation profit (section 113(1)). She has none, so it is carried forward to the next tax year.
Business profit stays ₹1,10,000. Other sources stay ₹20,000.
Gross total income = ₹50,000 + ₹1,10,000 + ₹20,000 = ₹1,80,000.

Answer: Gross total income ₹1,80,000. Speculation loss ₹30,000 is carried forward under section 113 for up to four tax years.

Exam tips

Draw a head-wise table first. Examiners give step marks for correct netting and for showing carry forward with the section.
In MCQs, look for the trap word: Salaries, Capital gains, speculation. Most options fail one of the fixed restrictions.
Always state the sequence: section 108 first, then section 109. Write the cap of ₹2,00,000 whenever house property loss appears.
Mention the carry forward period: eight tax years for house property, business and capital loss; four tax years for speculation and race horse loss.
If the question mentions search or survey, recall section 120: no loss set off against undisclosed income.

Practice questions from Set off and Carry Forward of Losses

Set Off of Losses: Inter-Source and Inter-Head Rules in other exams

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

CA IntermediateIntra-head and Inter-head Set-off of Losses

Set Off of Losses: Inter-Source and Inter-Head Rules: frequently asked questions

What is the difference between inter-source and inter-head set off?

Inter-source set off adjusts a loss against income from another source under the same head (section 108). Inter-head set off adjusts a remaining loss against income under other heads (section 109). Do the first before the second.

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

Capital losses cannot be set off against any other head (section 109(2)). Business loss cannot be set off against Salaries. House property loss is limited to ₹2,00,000 against other heads. Speculation, specified business and race horse losses are set off only against their own type of income.

Can a long-term capital loss be set off against short-term capital gain?

No. Under section 108(2)(b), a long-term capital loss is set off only against income from other long-term capital assets. A short-term capital loss can be set off against any other capital asset's income.

What happens to a loss that cannot be fully set off?

It is carried forward to the following tax years under the relevant section, such as 110, 111, 112, 113 or 115. Each section limits where it can be set off and for how many tax years.