Set-Off and Carry Forward of Losses — Complete Guide Under Income Tax Act India

When your business makes a loss or your investments decline in value, the Income Tax Act allows you to "set off" those losses against other incomes — reducing your tax liability. Losses that cannot be set off in the current year can be "carried forward" to future years. Here is the complete guide to understanding these rules.

Step 1 — Intra-Head Set-Off

First, losses from one source under a head of income are set off against income from another source under the same head:

• Loss from one business can be set off against profit from another business (under the same "Business/Profession" head)
• Loss from one house property can be set off against income from another house property
• Short-term capital loss can be set off against short-term or long-term capital gain
• Long-term capital loss can be set off ONLY against long-term capital gain

Exception — Speculative Loss: Loss from speculative business (intraday stock trading, commodity futures) can ONLY be set off against speculative business income — not against non-speculative business income.

Step 2 — Inter-Head Set-Off

If the loss still remains after intra-head set-off, it can be set off against income from other heads:

• Business loss can be set off against any income EXCEPT salary income
• House property loss can be set off against any other income including salary (limited to ₹2 lakh per year)
• Capital loss (short or long term) CANNOT be set off against income from any other head
• Speculative loss CANNOT be set off inter-head

Step 3 — Carry Forward

Losses remaining after both set-offs are carried forward:

• Non-speculative business loss: 8 years carry forward; can set off only against business income in future years
• Speculative business loss: 4 years carry forward; only against speculative business income
• Short-term capital loss: 8 years carry forward; against any capital gain (STCG or LTCG)
• Long-term capital loss: 8 years carry forward; only against LTCG
• House property loss: 8 years carry forward; against house property income only
• VDA (crypto) loss: Cannot be carried forward or set off at all

Critical — Return Must Be Filed on Time to Carry Forward

To carry forward losses (except house property losses), the ITR for that year MUST be filed by the original due date (July 31 for individuals). Late filing forfeits the carry-forward benefit. This makes timely ITR filing critically important for investors and business owners with losses.

Conclusion

Set-off and carry forward rules are powerful tax planning tools — but require careful understanding and timely ITR filing. SPOTON's CA team optimises loss utilisation for businesses and investors across Kerala. Contact us for expert income tax planning and return filing services.