A loss in one part of your finances can reduce the tax on another — but only if you follow the Act's rules on which loss can offset what, and only if you file on time. Handled well, a bad year becomes a tax asset you can use for up to eight years. Handled carelessly, the benefit disappears permanently. This guide sets out the rules.
The order of operations
Losses are adjusted in a fixed sequence:
1. Intra-head set-off (Section 70) — first, against income from another source within the same head. A loss from one business offsets profit from another business; a loss from one property offsets income from another. 2. Inter-head set-off (Section 71) — anything still unabsorbed can then be set off against income under other heads in the same year, subject to restrictions. 3. Carry forward (Sections 71B, 72, 73, 73A, 74) — whatever still remains is carried forward to future years.
An important principle: you cannot skip current-year set-off to preserve a loss for later. It must be absorbed against this year's income as far as the rules allow, and only the balance carries forward.
Inter-head set-off: the restrictions that matter
This is where most of the rules live.
| Loss type | Can it be set off against other heads? |
|---|---|
| House property | Yes, up to ₹2,00,000 a year — old regime only |
| Business (non-speculative), current year | Yes — against any head except salary |
| Business, brought forward | No — only against business income |
| Capital losses | Never — only against capital gains |
| Speculative business | No — only against speculative income |
| Specified business (Section 35AD) | No — only against specified business income |
| Owning and maintaining racehorses | No — only against the same activity |
Two points deserve emphasis.
The current-year vs brought-forward distinction for business losses. A current-year business loss can be set off against other heads (except salary) under Section 71. But once it's been carried forward, it can only ever be set off against business income under Section 72. Many people assume a carried-forward business loss can shelter their salary — it cannot.
Capital losses are ring-fenced entirely. They never touch other heads. Within the capital gains head: short-term capital loss can be set off against both short-term and long-term gains, but long-term capital loss can only be set off against long-term gains. See our guide to capital gains and F&O.
The new regime blocks house property loss set-off
A change with real cost: under the new regime (Section 115BAC), the inter-head set-off of house property loss is entirely blocked — not reduced, but zero. Under the old regime you can still set off up to ₹2 lakh against salary or other income.
Worked comparison. A let-out property produces a house property loss of ₹3,31,000 against a ₹10 lakh salary:
- Old regime: ₹2,00,000 set off against salary; the remaining ₹1,31,000 carries forward.
- New regime: ₹0 set off. The entire ₹3,31,000 carries forward.
At a 20% slab, that's roughly ₹41,600 more tax in the year under the new regime. Intra-head set-off — one property's loss against another's income — remains available in both regimes, with no cap. See our guides to income from house property and the new vs old regime.
How long each loss survives
| Loss type | Carry-forward period | Set off against |
|---|---|---|
| House property (Sec 71B) | 8 assessment years | House property income only |
| Business, non-speculative (Sec 72) | 8 assessment years | Business income only |
| Capital loss (Sec 74) | 8 assessment years | Capital gains (LTCL only against LTCG) |
| Speculative business (Sec 73) | 4 assessment years | Speculative income only |
| Specified business, Sec 35AD (Sec 73A) | Indefinite | Specified business income |
| Racehorses (Sec 74A) | 4 assessment years | Same activity |
| Unabsorbed depreciation (Sec 32(2)) | Indefinite | Any income except salary and casual income |
Unabsorbed depreciation is the most generous provision in this area — no time limit, and a wide set-off base. It's also treated differently from a business loss in several respects, so businesses should track the two separately rather than lumping them together.
A useful point for business owners: a carried-forward business loss can be set off even if that business has since been discontinued — you don't have to keep the business running to use the loss.
The filing rule that can destroy your loss
Section 80, read with Section 139(3): to carry a loss forward, you must file your return by the due date. File late, and you permanently lose the right to carry forward:
- business losses,
- capital losses,
- speculative losses, and
- specified business losses.
Two exceptions survive late filing:
- House property loss (Section 71B), and
- Unabsorbed depreciation (Section 32(2)).
And note the nuance: current-year set-off is still available even with a late return — it's only the carry forward that's forfeited. For a trader sitting on a large capital loss, missing the due date is one of the most expensive mistakes possible. See our guide to belated, revised, and updated returns.
A practical example: intraday vs F&O
This trips up traders constantly. Intraday equity trading is a speculative business; F&O is a non-speculative business. So:
- An intraday loss cannot be set off against F&O profits — speculative losses only offset speculative income.
- The intraday loss carries forward for 4 years, usable only against future speculative profits.
- An F&O loss, being a normal business loss, is far more flexible: set off against other heads (except salary) in the current year, then carried forward 8 years against business income.
Traders who run both should keep the two streams clearly separated in their books and in Schedule CFL.
Other restrictions to know
- Section 78 — where a partnership firm's constitution changes (a partner retires or dies), the retiring partner's share of loss cannot be carried forward. This restriction does not apply to unabsorbed depreciation.
- Section 79 — a closely held company that undergoes a substantial change in shareholding generally loses the right to carry forward earlier losses, subject to relief for eligible start-ups under Section 80-IAC.
Reporting it in your ITR
Carried-forward losses are reported in Schedule CFL, with the year of origin and the amount for each loss type. Two housekeeping rules matter:
- Report the loss in the year it arises, even if you have no income to set it off against — otherwise there's no record to carry forward.
- Carry the schedule accurately year to year. A loss omitted in one year's return is difficult to revive later.
Because losses arise across capital gains and business income, you'll generally need ITR-2 or ITR-3 — see our guide to which ITR form to file.
Common mistakes to avoid
- Filing after the due date and forfeiting the carry forward.
- Setting off a brought-forward business loss against salary — not permitted.
- Expecting a capital loss to reduce salary or business income — it never can.
- Netting intraday losses against F&O profits.
- Assuming the ₹2 lakh house property set-off works in the new regime — it doesn't.
- Failing to report a loss in the year it arose.
A note on changing rules
Loss provisions are technical and periodically amended, and the Income Tax Act, 2025 renumbers them from AY 2027-28 (the substance being largely carried over). Treat this as a current-position guide for AY 2026-27 and confirm the treatment of your specific loss before filing.
Conclusion
The rules reward organisation. Set off within the head first, then across heads where permitted, and carry forward the rest — business and capital losses for eight years, speculative for four, unabsorbed depreciation indefinitely. Remember the three that catch people out: capital losses never leave their head, a brought-forward business loss can't touch salary, and filing late destroys most carry-forwards permanently. Track your losses year by year in Schedule CFL and a difficult year becomes a legitimate shield for a profitable one.
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FAQs
1. What is the difference between intra-head and inter-head set-off? Intra-head set-off (Section 70) adjusts a loss against income from another source under the same head — one business against another. Inter-head set-off (Section 71) adjusts the remaining loss against income under other heads, subject to restrictions.
2. Can I set off a capital loss against my salary? No. Capital losses can only be set off against capital gains — never against salary or any other head. Short-term capital loss can offset both short-term and long-term gains; long-term capital loss only offsets long-term gains.
3. How long can losses be carried forward? Business and capital losses for 8 assessment years, house property loss for 8 years, speculative and racehorse losses for 4 years, and unabsorbed depreciation and specified business losses indefinitely.
4. What happens if I file my return late? You permanently lose the right to carry forward business, capital, speculative, and specified business losses. Only house property loss and unabsorbed depreciation survive late filing. Current-year set-off is still allowed.
5. Can I set off my intraday loss against F&O profits? No. Intraday equity trading is a speculative business, so its losses can only be set off against speculative income. The loss carries forward for 4 years. F&O is non-speculative business income and follows the more flexible business loss rules.
6. Does the ₹2 lakh house property set-off apply under the new regime? No. Under the new regime, inter-head set-off of house property loss is blocked entirely. It's available only under the old regime, capped at ₹2,00,000. Intra-head set-off works under both regimes without a cap.
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Suggested Internal Links
- ITR for Capital Gains & F&O → `/itr-capital-gains-fno/` — anchor: "capital gains and F&O income"
- Income from House Property → `/income-from-house-property/` — anchor: "income from house property"
- New vs Old Tax Regime → `/new-vs-old-tax-regime/` — anchor: "comparing the two regimes"
- Belated, Revised & Updated Returns → `/belated-revised-updated-return/` — anchor: "filing after the due date"
- Which ITR Form to File → `/which-itr-form-to-file/` — anchor: "which ITR form applies"
- Section 44AD Presumptive Taxation → `/section-44ad-presumptive-taxation/` — anchor: "presumptive taxation for business"
- ITR Filing Service → `/services/itr-filing/` — anchor: "get your return filed"
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About the author
Srishty
Senior Advisor at Regikart. Want to discuss this in the context of your business?
