NISM-Series-X-B: Investment Adviser (Level 2) · Tax Provisions for Special Cases

Set-off and Carry Forward of Losses: Rules for NISM X-B

Updated 11 October 2026 · Fact-checked

Set-off means adjusting a loss against income of the same year. First set it off within the same head (intra-head), then against other heads (inter-head), subject to exceptions. Any loss left over is carried forward for the period the law allows, and only if conditions such as timely return filing are met.

Understand Set-off and Carry Forward of Losses

A loss is only useful for tax if you can use it to reduce taxable income. The Income-tax Act lets you do this in two stages. Stage one is set-off in the same year. Stage two is carry forward to later years.

Intra-head set-off means a loss under a head is first set off against income under the same head. Example: a loss from one business is set off against profit from another business. Exceptions: a loss from a speculative business can be set off only against speculative business profit. A loss from owning and maintaining race horses can be set off only against income from owning and maintaining race horses. A long-term capital loss can be set off only against long-term capital gains. A short-term capital loss can be set off against both short-term and long-term capital gains.

Inter-head set-off means any loss still left is set off against income under other heads. Important restrictions: a capital loss (short or long term) cannot be set off against any other head. A non-speculative business loss can be set off against income under other heads, such as house property, capital gains and other sources, but not against salary income. No loss can be set off against winnings from lotteries, crossword puzzles, races and similar sources. Loss from a speculative business is not set off against other heads. Loss from the activity of owning and maintaining race horses is set off only against income from owning and maintaining race horses, and not against any other head. Current-year loss from house property can be set off against other heads, but the limit for the set-off against other heads is ₹2,00,000 per year. This cap applies to the loss of the current year under the head house property. A brought-forward house property loss cannot be set off against other heads. It goes only against house property income.

Carry forward applies to the unabsorbed amount. Most carried-forward losses can be used only against the same type of income. A carried-forward non-speculative business loss is set off only against profits and gains of business or profession. A race horse loss that is not absorbed is carried forward for 4 assessment years and set off only against income from owning and maintaining race horses. Carry forward of a business loss, whether non-speculative or speculative, needs a return filed on or before the due date (section 80). Capital losses also need a return filed on or before the due date. Two items do not need a timely return: house property loss and unabsorbed depreciation. The carry forward periods you must remember are in the formulas section.

Think of it as a ladder. Same head first. Other heads next, only where allowed. Carry forward last, with the right period and the right type of income.

Key formulas to remember

Order of set-off: Same head (intra-head) → other heads (inter-head) → carry forward; Apply the current year loss first. Then use brought-forward losses against the current year income.
Capital loss set-off: STCL → STCG or LTCG | LTCL → LTCG only; Capital losses cannot be set off against income under any other head.
Capital loss carry forward: Up to 8 assessment years; STCL against STCG or LTCG, LTCL against LTCG only; The loss must be determined in a return filed on or before the due date.
Non-speculative business loss carry forward: Up to 8 assessment years; set off only against profits and gains of business or profession; Needs a timely return (section 80). Cannot be set off against salary.
Speculative business loss: Carry forward up to 4 assessment years; set off only against speculative business income; Needs a timely return (section 80).
Race horse loss: Set off only against income from owning and maintaining race horses; carry forward up to 4 assessment years against the same income only; It cannot be set off against any other head or any other income.
House property loss: Current year set-off against other heads limited to ₹2,00,000; balance carried forward 8 assessment years against house property income only; The cap applies to the current-year loss only. Brought-forward loss is set off only against house property income. Can be carried forward even if the return is filed late.
Unabsorbed depreciation: Carried forward without time limit; set off against business income first, then income under any other head except salary; Treated as part of the depreciation of the next year. Does not need a timely return.

How to solve Set-off and Carry Forward of Losses questions

Use the same sequence for any question. Do not skip the type of loss, because the type decides where it can go.

1Identify the type of loss: house property, non-speculative business, speculative business, short-term capital, long-term capital, or depreciation.
2Identify every income or gain in the year, grouped by head.
3Set off the loss within its own head first, respecting the exceptions (for example LTCL only against LTCG).
4If a loss remains, check whether inter-head set-off is allowed for that loss. Capital losses and speculative losses are not.
5Apply any limit, such as ₹2,00,000 for house property loss against other heads.
6Carry forward the balance. Note the period and the type of income against which it can later be used.
7Check the condition: return filed by the due date, except house property loss and unabsorbed depreciation.

Quickest way: Three-question check

When to use it: Use this on MCQs asking whether a loss can be set off or for how long it is carried forward.

Ask: what kind of loss is it? Capital, speculative, race horse, business, house property or depreciation.
Ask: where can it go? Capital: only capital gains (LTCL only LTCG). Speculative: only speculative profit. Race horse: only income from owning and maintaining race horses. Non-speculative business: in the current year against other heads except salary (and never against lottery or race winnings); in carry forward only against profits and gains of business or profession. House property: current-year loss against other heads up to ₹2,00,000; brought-forward loss only against house property income. Unabsorbed depreciation: business income first, then any other head except salary.
Ask: how long? 8 assessment years for most; 4 for speculative and race horse losses; no limit for unabsorbed depreciation.

Common mistakes in Set-off and Carry Forward of Losses

Setting off a long-term capital loss against short-term capital gain.
Students remember that capital losses stay within capital gains and assume any combination works.
Fix: Remember the one-way rule: STCL can go against STCG or LTCG. LTCL goes against LTCG only.
Setting off a capital loss against salary or business income.
Confusion with house property loss, which can go against other heads.
Fix: Capital loss can never be set off against another head. It stays inside capital gains.
Saying speculative loss carries forward for 8 years.
Mixing it up with the common 8-year period.
Fix: Speculative business loss is carried forward for 4 assessment years only.
Ignoring the ₹2,00,000 limit on house property loss set-off against other heads.
Students set off the entire loss because inter-head set-off is allowed.
Fix: Set off at most ₹2,00,000 of the current-year loss against other heads and carry forward the rest.
Carrying forward a capital loss when the return was filed late.
Students forget the filing condition.
Fix: Business losses (non-speculative and speculative) and capital losses need a return filed by the due date. House property loss and unabsorbed depreciation do not.

Worked examples

Example 1

For a year, Mr. Rao has short-term capital loss of ₹80,000, long-term capital gain of ₹1,10,000 and salary income of ₹6,00,000. How much long-term capital gain is taxable, and how much loss is carried forward?

Show the solution

The loss is a short-term capital loss. It can be set off against STCG or LTCG.
There is no STCG, so set off against LTCG: ₹1,10,000 − ₹80,000 = ₹30,000.
The loss is fully absorbed, so nothing is carried forward.
Salary is a different head, so it is not touched.

Answer: Taxable long-term capital gain is ₹30,000 and no loss is carried forward.

Example 2

Ms. Iyer has long-term capital loss of ₹1,50,000, short-term capital gain of ₹90,000 and business profit of ₹2,00,000. Her return is filed on time. What happens to the loss?

Show the solution

A long-term capital loss can be set off only against long-term capital gain.
She has no long-term capital gain this year. STCG of ₹90,000 cannot absorb it.
Business profit is another head, so capital loss cannot be set off against it.
The entire ₹1,50,000 is carried forward, as the return is on time, for up to 8 assessment years, against future long-term capital gains only.

Answer: No set-off this year. ₹1,50,000 is carried forward for up to 8 assessment years against long-term capital gains.

Exam tips

Questions often test one-way rules: STCL against LTCG is allowed, LTCL against STCG is not.
Memorise the periods: 8 years for most losses, 4 years for speculative loss and race horse loss, unlimited for unabsorbed depreciation.
Look for the words 'return filed after the due date'. Capital losses and business losses (speculative and non-speculative) then cannot be carried forward. House property loss and unabsorbed depreciation still can.
In numerical questions, apply the ₹2,00,000 cap only to the current-year house property loss set off against other heads. A brought-forward house property loss is set off only against house property income.
Negative marking applies, so skip an option you cannot place with the three-question check rather than guess blindly.

Practice questions from Tax Provisions for Special Cases

Set-off and Carry Forward of Losses in other exams

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

Set-off and Carry Forward of Losses: frequently asked questions

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

Intra-head set-off adjusts a loss against income under the same head of income. Inter-head set-off adjusts a leftover loss against income under other heads. Some losses, such as capital losses and speculative losses, are not allowed inter-head set-off.

For how long can a capital loss be carried forward?

Both short-term and long-term capital losses can be carried forward for up to 8 assessment years. The loss must be determined in a return filed by the due date. Short-term loss can be used against any capital gain, long-term loss only against long-term capital gain.

What is the time limit for carrying forward business loss?

A non-speculative business loss can be carried forward for up to 8 assessment years and set off only against business profits. A speculative business loss is carried forward for 4 assessment years. Both need a return filed by the due date (section 80). Unabsorbed depreciation and house property loss do not need a timely return.

Can a house property loss be set off against salary?

Yes, for the current-year loss, within a limit of ₹2,00,000 per year for set-off against other heads. The balance is carried forward for up to 8 assessment years. A brought-forward loss is set off only against house property income.