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

Specified Business Loss: Set Off and Carry Forward

Updated 11 October 2026 · Fact-checked

Under section 114 of the Income-tax Act, 2025, 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. Any unabsorbed loss is carried forward to the next tax year and set off against specified business profits, year after year.

Understand Losses from Specified Business

Most business losses are flexible. A loss from one business can be set off against profit from another business or even against income under other heads, within the limits of the set-off rules. Some businesses are ring-fenced. The loss stays inside a closed group.

A specified business is one of those ring-fenced groups. The Income-tax Act, 2025 refers to it in section 46. Section 114 deals with what happens when you make a loss in it. The rule is simple: the loss can be set off only against profits and gains of another specified business.

This is the same design used for speculation business (section 113) and the activity of owning and maintaining race horses (section 115). In each case the law keeps the loss within its own group so that it cannot reduce tax on ordinary income.

If the loss cannot be fully absorbed in the same tax year, the balance is carried forward to the following tax year. It is then set off against the profits and gains of any specified business you carry on in that year. If anything is left, it moves forward again, and so on.

Note what the text of section 114 says and does not say. It gives the set-off and carry-forward mechanism. Unlike sections 110, 111, 112, 113 and 115, the section text supplied does not state a time limit on the carry forward. So do not import an eight-year or four-year limit into this section. Read the section for the point and state what it says.

Key rules to remember

Same-year set off (section 114(1)): Specified business loss → 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 any non-specified business income.
Carry forward (section 114(2)): Unabsorbed loss → next tax year → set off against profits of any specified business carried on by you in that year; If still not absorbed, carry forward again to the next year and so on.
Closing balance of loss: Loss to carry forward = Loss of the year + Brought forward loss − Specified business profit set off; Use this to track the balance year by year.
Comparison of time limits in neighbouring sections: Business loss (s.112): 8 tax years | Speculation loss (s.113): 4 tax years | Race horse loss (s.115): 4 tax years; Section 114 as supplied states no time limit. Do not assume one.

How to solve Losses from Specified Business questions

Use this method for any question on a specified business loss. It keeps the ring-fence clear and stops you from setting off against the wrong income.

1Identify whether the business is a specified business referred to in section 46. If the question names it as such, treat it as ring-fenced.
2Compute the profit or loss of each specified business separately for the tax year.
3Set off the current-year loss of one specified business against the profit of another specified business of the same year (section 114(1)).
4If a loss remains, do not set it off against any other head or any non-specified business. Carry it forward to the next tax year (section 114(2)).
5In the following year, first compute that year's specified business profit, then set off the brought forward loss against it.
6Carry any balance forward again and track the closing balance year by year.
7Write the conclusion: state the loss set off, the amount carried forward and the reason, citing section 114.

Quickest way: Ring-fence and roll forward

When to use it: Use this when a numerical question gives several years of figures and income from many sources, and you have limited time.

Draw two columns: specified business and everything else.
Put the specified business loss only in the first column. Never let it enter the second.
Net it against any specified business profit of the same year.
Roll the balance to the next year and net it against that year's specified business profit only.
Total income of the other column stays untouched by this loss. State the closing balance and cite section 114.

Common mistakes in Losses from Specified Business

Setting off a specified business loss against salary, house property or other business income.
Students apply the general rule for business loss, which is more flexible.
Fix: Remember section 114(1): the loss goes only against profits and gains of another specified business.
Applying a fixed number of years limit to this loss, such as eight or four years.
Students mix it up with sections 112, 113 and 115, which state limits.
Fix: Section 114 as supplied states no time limit. Mention the carry forward to the following years as the section says and do not invent a period.
Confusing specified business with speculation business.
Both are ring-fenced and the rules look similar.
Fix: Speculation loss is in section 113 and set off only against speculation profits. Specified business loss is in section 114 and set off only against specified business profits. Keep them in separate columns.
Forgetting to set off the loss against another specified business in the same year before carrying forward.
Students rush to carry forward the full loss.
Fix: Always do the same-year set off under section 114(1) first, and carry forward only the balance.
Carrying forward the loss into a year when there is no specified business and trying to use it elsewhere.
Students treat the brought forward loss as a general loss.
Fix: A brought forward loss can be set off only against specified business profits. If there are none, it moves forward again.

Worked examples

Example 1

For a tax year, Mr. Arvind has a loss of ₹4,00,000 from one specified business and a profit of ₹1,50,000 from another specified business. He also has salary income of ₹8,00,000. Find the loss that is carried forward and his income that is not reduced by this loss.

Show the solution

Both businesses are specified businesses, so section 114(1) allows the set off between them.
Set off the loss against the profit of the other specified business: ₹4,00,000 − ₹1,50,000 = ₹2,50,000 loss remaining.
The remaining loss cannot be set off against salary, because section 114(1) allows set off only against specified business profits.
Carry forward ₹2,50,000 to the following tax year under section 114(2).

Answer: ₹1,50,000 of the loss is set off against the other specified business. ₹2,50,000 is carried forward. Salary income of ₹8,00,000 is not reduced.

Example 2

Ms. Neha has a brought forward specified business loss of ₹2,50,000. In the next tax year, she earns specified business profit of ₹1,00,000 and business profit of ₹3,00,000 from a business that is not a specified business. Show the set off and the loss carried forward.

Show the solution

Under section 114(2), the brought forward loss is set off against profits of any specified business carried on by her in that year.
Specified business profit is ₹1,00,000. Set off ₹1,00,000 against it. The specified business profit becomes nil.
Balance loss: ₹2,50,000 − ₹1,00,000 = ₹1,50,000.
The ordinary business profit of ₹3,00,000 cannot be reduced by this loss, because it is not a specified business.
Carry forward ₹1,50,000 to the following tax year and so on.

Answer: ₹1,00,000 is set off and ₹1,50,000 is carried forward. The ₹3,00,000 business profit is taxed without reduction by this loss.

Exam tips

Write the section number: section 114 for specified business loss, section 113 for speculation, section 115 for race horses. Examiners reward the correct citation.
Always state the ring-fence in one line: the loss is set off only against profits and gains of another specified business.
In numerical questions, show the same-year set off first and then the carry forward balance. Marks are given for each step.
Do not state a time limit for section 114 unless the question supplies one. Contrast it with the stated limits in sections 112, 113 and 115 if the question asks for a comparison.
End with a clear conclusion giving the amount carried forward and the reason.

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

Losses from Specified Business in other exams

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

Losses from Specified Business: frequently asked questions

What is a specified business loss?

It is a loss computed in respect of a specified business referred to in section 46 of the Income-tax Act, 2025. Section 114 says it can be set off only against profits and gains of another specified business.

Can a specified business loss be set off against salary or house property income?

No. Section 114(1) allows set off only against profits and gains of another specified business. Other heads of income are not reduced by it.

How is a specified business loss carried forward?

If it cannot be wholly set off in the year, the balance is carried forward to the following tax year and set off against profits of any specified business. Any remaining balance is carried forward again.

Does section 114 give a time limit for carry forward?

The text of section 114 supplied does not state a time limit. Sections 112, 113 and 115 do state limits for their own losses, so do not apply those periods here.