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

Specified Business Loss Set Off and Carry Forward (Section 114)

Updated 10 October 2026 · Fact-checked

A loss computed in respect of a specified business (referred to in section 46) can be set off only against profits and gains of another specified business. The unabsorbed loss is carried forward to the next tax year and set off against specified business profits again, and so on. Section 114 sets no time limit.

Understand Specified Business Losses (Section 114)

Most business losses are flexible. You can set them off against other heads of income in the same year, and carry them forward against any business profit. A specified business loss is different. It is ring-fenced.

Section 114 says a loss computed in respect of a specified business, referred to in section 46, can be set off only against profits and gains of another specified business. It cannot be set off against salary, house property, capital gains, other sources, or against profits of your normal business.

If the loss is not fully absorbed, the balance is carried forward to the following tax year. There it is set off against profits of any specified business you carry on in that year. Anything still left moves forward again, and so on.

Notice what the section does not say. Section 112 (normal business loss) limits carry forward to eight tax years, and sections 113 and 115 limit it to four. Section 114 as supplied contains no such limit. So, on the text of the section, the carry forward has no time cap. Say this carefully in the exam: the text of section 114 prescribes no period.

The section gives the rule for the loss. The definition of which businesses are specified businesses sits in section 46, which you must read with this section. Always identify the business first, then apply the ring-fence.

Key rules to remember

Set off in the same year: Specified business loss → set off only against profits and gains of another specified business; Section 114(1). No set off against any other business or any other head.
Carry forward: Unabsorbed loss → next tax year → set off against specified business profits → balance forward again; Section 114(2)(i) and (ii). Repeats year after year.
Time limit: No number of years is stated in section 114; Contrast: section 112(2) allows eight tax years; sections 113(3) and 115(3) allow four.
Net position of specified business: Profit of other specified business − current loss − brought forward specified loss = balance profit or balance loss; If the result is negative, that amount is carried forward.

How to solve Specified Business Losses (Section 114) questions

Use this method for any question on a loss from a specified business.

1Identify each business of the assessee and mark which ones are specified businesses under section 46. Separate them from normal and speculation businesses.
2Compute the profit or loss of each specified business separately for the tax year.
3Set off the current specified loss only against profit of another specified business of the same year.
4If the loss is not fully absorbed, do not set it off against any other head or any normal business profit. Carry the balance forward.
5In later years, set off the brought forward loss against profit of any specified business of that year.
6Carry any remaining balance forward again. Note that section 114 states no year limit.
7Show the closing balance of the specified loss clearly, and state the reason: ring-fenced under section 114.

Quickest way: Ring-fence and tick method

When to use it: Use in numerical questions that mix several businesses and heads of income.

Draw three columns: specified business, other business, other heads.
Put the specified loss only in the first column.
Offset it only against specified profit. Leave the other columns untouched.
Write the balance as carried forward and move to the next year.

Common mistakes in Specified Business Losses (Section 114)

Setting off a specified business loss against salary or other business profit.
Students apply the general inter-head rule.
Fix: Remember section 114(1) says 'only'. The loss stays inside specified business.
Applying the eight-year limit of section 112 to specified loss.
All business losses feel alike.
Fix: Section 114 states no limit. Section 112 (eight years) is for normal business loss, not this one.
Treating specified business loss as speculation loss and using a four-year limit.
Both are ring-fenced and the wording is almost identical.
Fix: Section 113(3) has a four-year limit for speculation loss. Section 114 has none. Check which business the question names.
Setting off a specified business loss against speculation profit, or the reverse.
Both are called special businesses.
Fix: Each is ring-fenced against its own kind: specified against specified, speculation against speculation.
Forgetting to carry forward the unabsorbed balance, or carrying it against the wrong profit.
The student stops after the current year.
Fix: Always write the closing balance and set it off in the next year only against specified business profit.

Worked examples

Example 1

For the tax year 2026-27, Mr. Rao has: loss of ₹3,00,000 from specified business A; profit of ₹1,20,000 from specified business B; profit of ₹5,00,000 from his normal business; salary income of ₹4,00,000. Compute the set off and the loss carried forward.

Show the solution

Specified loss of A is ₹3,00,000.
It can be set off only against profit of another specified business. Business B has profit of ₹1,20,000.
Set off ₹1,20,000 against B. Loss remaining = ₹3,00,000 − ₹1,20,000 = ₹1,80,000.
The normal business profit of ₹5,00,000 and salary of ₹4,00,000 cannot absorb it under section 114(1).
Balance ₹1,80,000 is carried forward under section 114(2).

Answer: ₹1,20,000 is set off against specified business B. ₹1,80,000 is carried forward to the following tax year. Normal business profit (₹5,00,000) and salary (₹4,00,000) are taxed in full.

Example 2

Continuing from the above, in the next tax year Mr. Rao has a profit of ₹70,000 from a specified business and a profit of ₹2,00,000 from a normal business. Compute the set off of the brought forward loss and the balance to be carried forward.

Show the solution

Brought forward specified loss = ₹1,80,000.
Section 114(2)(i) allows set off only against profits of a specified business for that year: ₹70,000.
Set off ₹70,000. Balance = ₹1,80,000 − ₹70,000 = ₹1,10,000.
Profit of ₹2,00,000 from normal business cannot be used.
Balance ₹1,10,000 is carried forward again under section 114(2)(ii).

Answer: Specified business income after set off is nil. ₹1,10,000 is carried forward. Normal business profit of ₹2,00,000 remains fully taxable.

Exam tips

In an MCQ with the word 'only', think ring-fence: the answer is a set off against the same kind of business.
Name the section in your answer: section 114 for specified business, 113 for speculation, 112 for normal business loss.
Do not state a year limit for section 114. If asked to compare, say it prescribes none, unlike sections 112, 113 and 115.
Show a year-wise table of brought forward loss, set off and balance to earn step marks.
Read the question carefully to see whether the business is specified under section 46 before applying the rule.

Practice questions from Set off and Carry Forward of Losses

Specified Business Losses (Section 114) in other exams

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

Specified Business Losses (Section 114): frequently asked questions

Can specified business loss be set off against other income?

No. Section 114(1) allows it to be set off only against profits and gains of another specified business. It cannot be set off against other heads or normal business profit.

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

Section 114 as supplied states no number of years. The balance is carried forward to the following tax year and so on. Do not confuse this with the limits in sections 112, 113 and 115.

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

Both are ring-fenced and can be set off only against profit of the same kind of business. Speculation loss under section 113 can be carried forward for four tax years only. Section 114 states no such limit.

Where is specified business defined?

Section 114 refers to a specified business referred to in section 46. Read that section for the list of businesses that qualify.