Loss Set-off & Carry-Forward Rules

⚡ In shortA loss in one year need not be wasted — the Income-tax Act lets most losses be set off against other income now, or carried forward against future income — but each type of loss has its own window and its own rules about what it can offset.

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How it is calculated

House-property loss can be set off against any head in the same year, but only up to ₹2,00,000, and the balance carries forward for 8 years to be set off against house-property income alone. Non-speculative business loss can be set off against any head except salary in the current year, and carries forward 8 years against business income. Speculative business loss and losses from owning racehorses are ring-fenced to the same activity and carry forward only 4 years. Short-term capital loss can be set off against either short- or long-term gains; long-term capital loss can only go against long-term gains; both carry forward 8 years. Unabsorbed depreciation carries forward indefinitely. The critical condition: except for house-property loss, you must file your return by the due date under section 139(1) to carry any loss forward — file late and the right is simply lost.

The order is prescribed, not optional

Losses are first set off within the same head of income, then against other heads in the same year where permitted, and only the unabsorbed balance is carried forward. You cannot choose to carry a loss forward while paying tax on income it could have offset this year. Getting the sequence wrong changes both this year's tax and how much survives into future years.

Long-term and short-term behave differently

A long-term capital loss can only be set off against long-term capital gains. A short-term capital loss can be set off against either short-term or long-term gains, which makes it the more flexible of the two. Neither can be set off against salary. This asymmetry is why realising a short-term loss is often more useful than realising a long-term one of the same size.

Filing on time is the condition for carrying forward

Business losses and capital losses may be carried forward for eight assessment years — but only if the return for the loss year was filed by the due date. A belated return forfeits that right permanently, and no later filing restores it. House-property loss is the exception, remaining available even on a belated return. For anyone who sold shares at a loss, this makes an on-time return worth far more than the late fee it avoids.

House property and speculation have their own rules

Loss from house property can be set off against other heads in the same year only up to ₹2 lakh, with the balance carried forward for eight years to be set off against house-property income alone. Speculation losses can only be set off against speculation profits and carry forward for four years. Losses from specified businesses and from owning racehorses have their own separate regimes.

Where set-off is barred entirely

Some losses cannot be set off against anything. Losses on virtual digital assets cannot be set off against other virtual digital assets, against any other head, or carried forward at all. Losses from an exempt source cannot be set off against taxable income. And a business loss cannot be set off against salary income in the same year. Check whether the loss is usable before planning around it — the capital gains calculator computes the gains side.

Frequently asked questions

What happens if I file my ITR late — can I still carry forward losses?

No, except for house-property loss and unabsorbed depreciation. Carry-forward of business and capital losses requires the return to be filed by the section 139(1) due date. A belated return forfeits the right permanently.

Can I set off a capital loss against my salary?

No. Capital losses can only be set off against capital gains. Similarly, business loss cannot be set off against salary income.

How long can capital losses be carried forward?

Eight assessment years. Short-term capital loss can be set off against short- or long-term gains; long-term capital loss only against long-term gains.

Do losses carry forward under the new tax regime?

Set-off and carry-forward continue to operate, but the new regime disallows certain deductions and restricts set-off of house-property loss against other heads. Confirm your position with a CA.