Tax Laws and Practice · Clubbing Provisions and Set Off and Carry Forward of Losses

Loss under Different Heads of Income and Carry Forward Rules

Updated 11 October 2026 · Fact-checked

A loss that cannot be fully set off in the year it arises can be carried forward and set off against later income, but only of a permitted kind and for a limited period. House property, business, speculation and capital losses each have their own rule, time limit and filing condition. You solve questions by applying them head by head.

Understand Loss under Different Heads of Income and Carry Forward Rules

Start with the basic idea. If you lose money under one head, the law first lets you set it off against other income of the same year. Whatever is left over can sometimes be carried forward to later years. Carry forward is a concession, so each head comes with limits.

The limits cover three things: where the loss can be set off in later years, how long it can be carried forward, and what conditions you must meet. For example, a short-term capital loss can be set off against any capital gain, while a long-term capital loss can only be set off against long-term capital gains. A speculation loss can only be set off against speculation profit.

The time limits are counted in tax years immediately following the year in which the loss was first computed. Under the Income-tax Act, 2025, a capital loss can be carried forward for up to eight tax years (section 111). A speculation business loss can be carried forward for up to four tax years (section 113). A non-speculation business loss is also carried forward for up to eight tax years, under the business loss provision (section 112). A house property loss is likewise carried forward for up to eight tax years, and it can be set off only against income from house property.

There is a filing condition. As a general rule, business losses (including speculation losses) and capital losses are carried forward only if the return for the year of loss was filed within the due date. House property loss and unabsorbed depreciation are the usual exceptions to this condition. Check the facts for a late return before you write a carry forward conclusion.

Unabsorbed depreciation is different from a business loss. It has no time limit, and it can be set off against income under any head except salary. A loss under the head "Income from other sources" is generally not carried forward. It can only be set off in the same year as the law allows.

Key rules to remember

Capital loss carry forward (section 111): Carry forward period ≤ 8 tax years immediately succeeding the loss year; Short-term capital loss: set off against any capital gain of a later year. Long-term capital loss: only against long-term capital gains.
Speculation loss (section 113): Set off only against speculation profit; carry forward ≤ 4 tax years; Applies even to later years. Section 113(1) and (3).
Company dealing in shares (section 113(5)): Purchase and sale of shares of other companies is deemed speculation business to that extent; Not applied if gross total income mainly comes from house property, capital gains or other sources, or if its principal business is trading in shares, banking or granting loans (section 113(6)).
Business loss (non-speculation), section 112: Carry forward ≤ 8 tax years; set off against business income; Return of the loss year must have been filed by the due date.
House property loss: Current-year set off against other heads limited to ₹2,00,000; balance carried forward ≤ 8 tax years, set off only against house property income; No return-on-time condition for this loss.
Unabsorbed depreciation: Carried forward without time limit; set off against income under any head except salary; Set off after brought forward business losses are applied.
Bank amalgamation cases (section 117): Accumulated loss of predecessor carried forward in the successor for ≤ 8 tax years from the year it was first computed for the original predecessor; Applies to schemes brought into force on or after 1 April 2025.

How to solve Loss under Different Heads of Income and Carry Forward Rules questions

Use the same sequence for any question on losses under the different heads.

1List the current-year income or loss under each head and note the type of loss: house property, non-speculation business, speculation, short-term capital, long-term capital, other sources.
2Apply current-year set off first: within the same head, then between heads, observing the restrictions (for example house property loss limit of ₹2,00,000, no set off of long-term capital loss against short-term gain).
3Bring forward the earlier losses. Set off in order of earliest year first, against the permitted income only: house property loss against house property income, business loss against business income, speculation loss against speculation profit, capital losses against capital gains as permitted.
4Apply unabsorbed depreciation after the brought forward business loss, against any head except salary.
5Check the time limit for each loss: 4 tax years for speculation loss, 8 tax years for capital, business and house property losses. Drop any loss that has expired.
6Check the return condition. If the return of the loss year was not filed on time, do not carry forward business or capital losses. House property loss and unabsorbed depreciation are the usual exceptions.
7Write the balance carried forward for each loss and state the conclusion with the provision.

Quickest way: Loss ledger by type

When to use it: When the question lists losses from several years and asks for gross total income or the balance carried forward.

Draw one line per loss type with columns: year, amount, expiry year.
Mark the only income each line can be set off against (for example speculation loss: speculation profit only).
Strike out lines whose time limit has passed.
Set off earliest year first and update the balance.
Add a last line for unabsorbed depreciation, which has no expiry and is applied after business loss.

Common mistakes in Loss under Different Heads of Income and Carry Forward Rules

Setting off a long-term capital loss against short-term capital gain.
Students remember that capital losses can be set off against capital gains and forget the one-way rule.
Fix: Remember: short-term loss can go against both short-term and long-term gains. Long-term loss goes only against long-term gains (section 111).
Carrying forward a speculation loss for eight years.
Students apply the general business loss period to all business losses.
Fix: Speculation loss is carried forward for a maximum of four tax years (section 113(3)) and set off only against speculation profit.
Carrying forward a business or capital loss when the return was filed late.
The filing condition is overlooked while computing the numbers.
Fix: Check the filing date first. Without a return filed on time, the loss is not carried forward. House property loss and unabsorbed depreciation are the usual exceptions.
Setting off the full house property loss against salary.
Students forget the monetary cap for current-year set off.
Fix: Set off a maximum of ₹2,00,000 against other heads in the same year and carry forward the balance against house property income only.
Applying a time limit to unabsorbed depreciation.
It is confused with business loss, which has an eight-year limit.
Fix: Unabsorbed depreciation can be carried forward indefinitely and set off against any head except salary.
Treating a company's share trading loss as an ordinary business loss without checking section 113(5).
Students miss the deemed speculation rule for companies.
Fix: Check whether the exceptions in section 113(6) apply: income mainly from house property, capital gains or other sources, or a principal business of trading in shares, banking or lending.

Worked examples

Example 1

Mr Rohan has salary income of ₹8,00,000 and a loss of ₹3,50,000 from a let-out house property in the current year. In the next year his house property income is ₹90,000 and salary is ₹8,00,000. Compute gross total income of both years and the balance loss carried forward. Assume no restriction by tax regime applies.

Show the solution

Year 1: loss from house property is ₹3,50,000. Set off against other heads is limited to ₹2,00,000.
Set off ₹2,00,000 against salary: 8,00,000 − 2,00,000 = ₹6,00,000. Gross total income for year 1 is ₹6,00,000.
Balance loss to carry forward: 3,50,000 − 2,00,000 = ₹1,50,000. This can be set off only against house property income.
Year 2: house property income is ₹90,000. Set off brought forward loss of ₹90,000 against it, so house property income becomes nil.
Gross total income of year 2 = salary ₹8,00,000 + nil = ₹8,00,000.
Balance loss carried forward: 1,50,000 − 90,000 = ₹60,000, which can be carried forward for the remaining years within the eight-year period.

Answer: Gross total income is ₹6,00,000 for year 1 and ₹8,00,000 for year 2. ₹60,000 of house property loss is carried forward, set off only against house property income.

Example 2

In year 1, Mr Arun, who filed his return on time, has short-term capital gain of ₹20,000 on one asset, short-term capital loss of ₹50,000 on another, and long-term capital loss of ₹80,000. In year 2 he has long-term capital gain of ₹1,10,000 and short-term capital gain of ₹15,000. Compute capital gains for both years (ignore exemptions).

Show the solution

Year 1: set off the short-term loss ₹50,000 against short-term gain ₹20,000. Balance short-term loss = ₹30,000.
The long-term loss of ₹80,000 cannot be set off against short-term gain. Nothing remains to be set off in year 1, so capital gains for year 1 are nil.
Carry forward: short-term capital loss ₹30,000 and long-term capital loss ₹80,000 (up to eight tax years under section 111(2)).
Year 2: set off the long-term loss ₹80,000 against long-term gain ₹1,10,000. Balance long-term gain = ₹30,000.
Set off the short-term loss ₹30,000 first against short-term gain ₹15,000. Balance short-term gain is nil and loss left is ₹15,000.
Set off the remaining ₹15,000 loss against long-term gain ₹30,000. Long-term gain left = ₹15,000.
Check: total gains 1,10,000 + 15,000 = 1,25,000. Total losses 80,000 + 30,000 = 1,10,000. Net = ₹15,000.

Answer: Capital gains for year 1 is nil, with ₹30,000 short-term and ₹80,000 long-term loss carried forward. In year 2 capital gains is ₹15,000, all long-term.

Exam tips

Write the section when you state the period: section 111 for capital losses, section 113 for speculation losses, section 112 for business losses.
Always state the filing condition in the conclusion, because ICSI-style answers are marked for the conclusion step.
Use a small table-like list of losses with their expiry years in your working. It shows the examiner you checked time limits.
In company questions on share trading, check section 113(5) and the exceptions in 113(6) before treating the loss as speculation.
Do not mix the 1961 Act with the 2025 Act. Use the Income-tax Act, 2025 terms: tax year, not assessment year.

Practice questions from Clubbing Provisions and Set Off and Carry Forward of Losses

Loss under Different Heads of Income and Carry Forward Rules in other exams

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

Loss under Different Heads of Income and Carry Forward Rules: frequently asked questions

What is the time limit for carrying forward a house property loss?

A house property loss can be carried forward for up to eight tax years immediately following the year in which it was computed. In those years it can be set off only against income from house property. The return does not have to be filed on time for this loss.

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

No. Under section 111, a long-term capital loss is set off only against long-term capital gains. A short-term capital loss can be set off against any capital gain, short-term or long-term. Both can be carried forward for up to eight tax years.

How long can a speculation loss be carried forward?

A speculation business loss can be carried forward for up to four tax years after the year in which it was first computed. It can be set off only against profits of a speculation business, as section 113 says.

Is filing the return on time necessary to carry forward losses?

For business losses and capital losses, yes. The return of the loss year must be filed within the due date. House property loss and unabsorbed depreciation are the usual exceptions. A late return can therefore cost you the carry forward.

What is the order of set off of brought forward losses?

Set off current-year losses first. Then apply brought forward losses, earliest year first, against the income they are allowed to be set off against. Brought forward business loss is applied before unabsorbed depreciation.