Start with the correct year and tax regime
The examples use the Income-tax Act, 1961. Apply the corresponding loss provisions and section 536 of the Income-tax Act, 2025 for tax years governed by that Act. Eligible balances brought into the new Act retain their original nature and unexpired period; a transition does not restart the clock.
Under sections 70 and 71, first classify and compute each source and apply permitted set-off within the head, then consider any permitted current-year set-off across heads. Check restrictions for particular income or regimes. In particular, an ordinary business loss cannot offset salary and cannot be used against income where a special provision such as section 115BBE bars loss set-off.
| Loss under the 1961 Act | Current-year set-off | Carry-forward and later use, subject to conditions |
|---|---|---|
| House property | Apply within the head first. Under ordinary provisions, section 71(3A) limits total cross-head use to ₹2 lakh. Under section 115BAC there is no cross-head set-off. | Section 71B generally allows eight succeeding AYs, against house property income only; check regime restrictions. |
| Ordinary business | Permitted business income and, subject to restrictions, other heads except salary. | Eight succeeding AYs under section 72; later set-off against taxable business or professional profits. |
| Speculation business | Only against speculation business profits. | Four succeeding AYs under section 73; same restriction. |
| Specified business under section 35AD | Only against specified business profits. | Section 73A does not prescribe an eight-year cap; later use only against specified business profits. |
| Short-term capital | Against short-term or long-term capital gains only. | Eight succeeding AYs under section 74; same restriction. |
| Long-term capital | Against long-term capital gains only. | Eight succeeding AYs under section 74; same restriction. |
| Owning and maintaining racehorses | Only income from that activity. | Four succeeding AYs under section 74A, subject to the statutory conditions. |
| Unabsorbed depreciation | Apply section 32(2) and the income and regime restrictions that govern the allowance. | Ordinarily no fixed expiry under section 32(2); deemed depreciation subject to statutory priorities and restrictions, including the salary bar. |
From AY 2024–25, section 115BAC is the default for eligible individuals, subject to a valid choice of the old regime. For AY 2026–27 the Department’s guidance says the net let-out house property loss under section 115BAC is neither available across heads nor carried forward. Distinguish this filing position on a loss computed in the new regime from the treatment of eligible earlier balances. Check section 24(b) before computing any house property loss; a self-occupied property does not normally produce a deductible ₹3.50 lakh interest loss.
Preserve the right to carry forward
Sections 139(3) and 80 generally require a qualifying loss return by the applicable section 139(1) deadline for business, speculation, specified business, capital and racehorse loss carry-forward. Check official extensions and any legally available condonation. A filing delay does not by itself extinguish eligible balances from earlier returns or bar permitted current-year set-off. Section 80 does not list section 71B or section 32(2); distinguish their balances, confirm they are properly determined, and apply any regime-specific limits.
Under section 78(1), on retirement or death the amount restricted is the retired or deceased partner’s share of the loss to the extent it exceeds that partner’s share of the firm’s profits for the relevant previous year. Keep unabsorbed depreciation separate from the section 78 loss computation. Section 72(2) gives brought-forward business loss priority over brought-forward depreciation in the prescribed circumstances; compute current-year allowances first. Check special restrictions such as section 115BAA for companies where relevant.
Seven worked illustrations
1. Individual with several heads of income
For FY 2023–24 assume a valid choice of the old regime, salary of ₹24 lakh after deductions, net loss of ₹3.50 lakh on let-out house property, ordinary clinic loss of ₹5 lakh, ₹7 lakh short-term equity gains, ₹4 lakh long-term loss on land, and ₹2.50 lakh bank interest. The long-term capital loss cannot reduce the short-term gain. In the stated allocation, the clinic loss leaves ₹2 lakh short-term gain. Use ₹2 lakh of the property loss against salary. The resulting total before any further deductions is ₹22 lakh + ₹2 lakh + ₹2.50 lakh = ₹26.50 lakh. The remaining ₹1.50 lakh property loss and ₹4 lakh long-term loss are tracked separately, assuming carry-forward conditions are met. This is an income computation, not a calculation of tax on the gains.
2. Non-audit firm files five days late
Assume a ₹42 lakh business loss exclusive of a separate ₹18 lakh unabsorbed depreciation balance, a 31 July 2024 deadline, and filing on 5 August. With no extension or condonation, the current ₹42 lakh cannot carry forward under section 80. Section 32(2) is separate. At an assumed 30% firm rate plus 4% cess without surcharge, full future use of ₹42 lakh could have saved ₹13.104 lakh; that is a hypothetical benefit, not an additional tax assessed for the late filing year.
3. Business loss near expiry
In FY 2024–25, assume a ₹25 lakh business loss from FY 2016–17 is still eligible in its eighth and last succeeding assessment year, there is ₹30 lakh of eligible unabsorbed depreciation, and current taxable business profit after current allowances is ₹28 lakh. Apply ₹25 lakh first and then ₹3 lakh depreciation. Business profit is nil and ₹27 lakh depreciation remains, subject to applicable conditions.
4. Partner retirement at the start of the year
A firm with three equal partners carries ₹45 lakh eligible loss. One retires on 1 April 2024 and has no share of the firm’s profits for FY 2024–25 on these facts. The restricted share is ₹15 lakh; ₹30 lakh remains eligible. Against ₹50 lakh current business profit the resulting amount is ₹20 lakh. Likewise, for a ₹60 lakh balance with an equal retiring partner and no profit share, ₹20 lakh is restricted and ₹40 lakh survives. Recompute if the outgoing partner has a relevant profit share.
5. Intraday trades and exchange derivatives
Assume a ₹6 lakh speculative cash equity loss from non-delivery trades, ₹10 lakh profits from derivatives meeting section 43(5)(d), and ₹3 lakh interest. The speculative loss does not reduce either amount. The total of those profits and interest is ₹13 lakh before other adjustments. Track the ₹6 lakh speculative loss for up to four succeeding AYs if the return and other conditions are met.
6. Property gain and two capital losses
Assume FY 2023–24, with ₹35 lakh long-term gain on property, ₹12 lakh short-term loss on equity and ₹15 lakh long-term loss on unlisted debentures held long enough under the then applicable law. Net long-term gain is ₹8 lakh after both losses. For an unlisted bond or debenture transferred, redeemed or matured on or after 23 July 2024, reassess character under section 50AA rather than carrying forward this example’s classification.
7. Deferred tax is a separate accounting assessment
A partnership with ₹18 crore turnover in FY 2025–26 falls within the ICAI announcement’s Phase I turnover threshold. If AS 22 applies in full, ₹35 lakh eligible carried-forward losses at an assumed 31.2% enacted rate would produce a potential ₹10.92 lakh deferred tax asset. Recognise only the portion supported by virtual certainty with convincing evidence of sufficient eligible future taxable income. A sales contract alone does not show profit or use before expiry. Apply the presentation rules and retain the loss and evidence schedules.
Frequently asked questions
Can a business loss offset salary?
No. Check other income against applicable special restrictions before making a cross-head set-off.
Does one late return erase all previous losses?
No. Test the loss year, applicable deadline and the specific category separately.
Does unabsorbed depreciation have an eight-year limit?
Generally no under section 32(2), but distinguish it from business loss and verify eligibility under the applicable regime.
Can short-term capital loss reduce long-term gains?
Yes. A long-term capital loss can only reduce long-term capital gains.
Does every house property loss qualify for the ₹2 lakh set-off?
No. Compute the deductible loss and identify the regime first. The cap is for combined cross-head use under the ordinary provisions.
What belongs in a loss register?
Track original year, source, regime, return or order, permitted use, expiry, partner adjustments and reconciliations to the return. Keep the accounting recognition assessment separate.
Sources
- Income-tax Act, 1961: sections 24, 32, 43(5), 50AA, 70–80, 115BAC, 115BBE and 139
- Income-tax Act, 2025, as amended: sections 108–121 and 536
- Income Tax Department: transition and carry-forward FAQs
- Income Tax Department: AY 2026–27 guidance for individuals with business or professional income
- ICAI: phased applicability of non-corporate and LLP financial statement guidance
- ICAI AS 22: deferred tax recognition and evidence