Quick Answer
11 min read|Updated: Apr 1, 2026|Income-tax
Quick Answer
The Income Tax Act 2025 allows taxpayers to set off losses against income — first within the same head (intra-head), then across heads (inter-head) — subject to specific restrictions. Losses that remain unabsorbed can be carried forward: business losses for 8 years, capital losses for 8 years, speculative losses for 4 years, and unabsorbed depreciation indefinitely.
Crypto/VDA Loss — Complete Prohibition
The treatment of virtual digital asset (VDA) losses is the most restrictive provision in the entire set-off framework. Under the Income Tax Act 2025, carrying forward the position established from Budget 2022:
| Aspect | Treatment of Crypto/VDA Loss |
|---|---|
| Set-off against other VDA gains | NOT allowed — loss on Bitcoin cannot be set off against gain on Ethereum |
| Set-off against salary/business/other income | NOT allowed |
| Set-off against capital gains (equity/property) | NOT allowed |
| Carry forward to future years | NOT allowed — loss lapses permanently |
| Deduction of expenses against VDA income | Only cost of acquisition allowed — no other deduction |
| Tax rate on VDA gains | Flat 30% + surcharge + 4% cess (no slab benefit) |
| TDS on VDA transfer | 1% under Section 194S (threshold ₹50,000 for specified persons, ₹10,000 for others) |
This means a taxpayer who earns ₹10 lakh from Bitcoin and loses ₹15 lakh on Ethereum pays tax on the full ₹10 lakh — the ₹15 lakh loss simply vanishes. For complete coverage, see our cryptocurrency/VDA tax guide.
Carry Forward Rules & Time Limits
Losses that remain unabsorbed after intra-head and inter-head set-off can be carried forward to subsequent years, subject to type-specific time limits and conditions:
| Type of Loss | Carry Forward Period | Set Off Against (in future years) | Return Filing Required by Due Date? |
|---|---|---|---|
| House Property Loss | 8 assessment years | House property income only | No — can carry forward even with belated return |
| Non-Speculative Business Loss | 8 assessment years | Business income only | Yes — mandatory |
| Speculative Business Loss | 4 assessment years | Speculative business income only | Yes — mandatory |
| Specified Business Loss (35AD type) | Unlimited | Specified business income only | Yes — mandatory |
| Short-Term Capital Loss | 8 assessment years | STCG or LTCG | Yes — mandatory |
| Long-Term Capital Loss | 8 assessment years | LTCG only | Yes — mandatory |
| Unabsorbed Depreciation | Unlimited (no time limit) | Any head of income | No — no filing deadline requirement |
| Crypto/VDA Loss | No carry forward | Not applicable | Not applicable |
| Loss from Owning Racehorses | 4 assessment years | Racehorse income only | Yes — mandatory |
Expert Tip — CA V. Viswanathan
The most critical practical point: if you miss the due date for filing your ITR, you will lose the right to carry forward business losses, capital losses, and speculative losses — even if you later file a belated return. Only house property loss and unabsorbed depreciation survive a late filing. Always file by 31 July (non-audit) or 31 October (audit) to preserve your carry-forward rights. See our ITR filing due dates guide for all deadlines.
Order of Set-Off — Step-by-Step Priority
The Income Tax Act 2025 prescribes a specific order in which losses must be set off against income. Understanding this sequence is essential for correct computation:
- Step 1 — Intra-head set-off: Adjust losses from one source against income from another source under the same head (e.g., loss from Business A against profit from Business B).
- Step 2 — Inter-head set-off (current year): Remaining loss under a head is set off against income under other heads, subject to restrictions (house property capped at ₹2L, capital loss only against capital gains, etc.).
- Step 3 — Brought-forward losses: After current-year adjustments, brought-forward losses from earlier years are set off in chronological order (oldest losses first), subject to type-specific restrictions.
- Step 4 — Unabsorbed depreciation: After all loss set-offs, unabsorbed depreciation from earlier years is absorbed against any remaining income under any head.
- Step 5 — Deductions under Chapter VI-A: Deductions under Sections 80C, 80D, etc. are claimed against the gross total income arrived at after all set-offs.
51% Shareholding Continuity Rule for Companies
For closely held companies, the Income Tax Act 2025 continues the requirement that at least 51% of voting power must remain with the same shareholders for carry-forward purposes. Specifically:
- At least 51% of the shares carrying voting power must be beneficially held on the last day of the year of set-off by persons who held shares on the last day of the year in which the loss was incurred.
- Listed companies are exempt from this rule — shareholding changes in listed entities do not impact carry-forward rights.
- Eligible startups (recognised under DPIIT) get a relaxation: the condition is satisfied if the original promoters continue to hold shares, even if below 51%. All shareholders who held shares in the year of loss need not maintain their holding.
- This rule applies to business loss and unabsorbed depreciation carry-forward by companies.
- The beneficial ownership test looks at the last day of the relevant assessment year, not intermediate dates.
Numerical Example — Complete Set-Off Computation
Mr. Rajesh — AY 2026-27 Income & Loss Position:
| Head / Source | Amount (₹) |
|---|---|
| Salary Income (after standard deduction) | 12,00,000 |
| House Property 1 (Let-out) — Net Income | 1,50,000 |
| House Property 2 (Self-occupied) — Loss (interest on home loan) | (4,50,000) |
| Non-Speculative Business Profit | 3,00,000 |
| Speculative Business Loss | (2,00,000) |
| STCG on equity shares (Section 111A) | 80,000 |
| LTCG on property sale (Section 112) | 5,00,000 |
| LTCG loss on mutual fund units | (1,20,000) |
| Crypto/VDA Loss | (3,00,000) |
| Brought-forward business loss (AY 2024-25, filed by due date) | (1,50,000) |
Step 1 — Intra-head set-off:
- House Property: HP1 income ₹1,50,000 minus HP2 loss ₹4,50,000 = Net HP loss of ₹3,00,000
- Capital Gains: LTCG loss ₹1,20,000 set off against LTCG ₹5,00,000 = Net LTCG ₹3,80,000. STCG ₹80,000 remains unchanged. Total capital gains = ₹4,60,000
- Business: Speculative loss ₹2,00,000 cannot be set off against non-speculative income ₹3,00,000. Both remain separate.
Step 2 — Inter-head set-off (current year):
- HP loss of ₹3,00,000 — cap applies: only ₹2,00,000 can be set off against salary. Salary becomes ₹12,00,000 − ₹2,00,000 = ₹10,00,000. Remaining HP loss of ₹1,00,000 carried forward (8 years, HP income only).
- Speculative loss of ₹2,00,000 — no speculative income exists. Carry forward for 4 years.
- Crypto loss of ₹3,00,000 — permanently lost. No set-off, no carry forward.
Step 3 — Brought-forward losses:
- B/F business loss of ₹1,50,000 set off against current non-speculative business income of ₹3,00,000. Business income becomes ₹1,50,000.
Gross Total Income for AY 2026-27:
- Salary: ₹10,00,000 + Business: ₹1,50,000 + Capital Gains: ₹4,60,000 = ₹16,10,000
Losses carried forward to AY 2027-28:
- House property loss: ₹1,00,000 (against HP income only, 7 years remaining)
- Speculative business loss: ₹2,00,000 (against speculative income only, 3 years remaining)
For computing tax on ₹16,10,000 GTI, refer to the applicable income tax slab rates for AY 2026-27.
Key Changes from Income Tax Act 1961
- Consolidation of provisions: The 2025 Act consolidates set-off and carry-forward rules (previously scattered across Sections 70-80 of the 1961 Act) into a more structured framework with clearer cross-references.
- Crypto/VDA codification: The VDA no-set-off rule (introduced via Budget 2022 amendments to the 1961 Act) is now embedded as a first-class provision in the 2025 Act rather than being an amendment overlay.
- Startup relaxation codified: The relaxation of the 51% shareholding continuity rule for eligible startups, which was added by amendment to the 1961 Act, is now part of the main statute.
- Updated return interaction: The 2025 Act clarifies how losses interact with updated returns filed under the Section 139(8A) equivalent — losses cannot be freshly claimed or increased in an updated return.
- No fundamental changes to limits: The ₹2 lakh house property loss cap, 8-year business loss carry forward, 4-year speculative loss period, and unlimited depreciation carry-forward remain unchanged in substance.
- Clearer transition rules: The transition guide explains how losses determined under the 1961 Act will be treated under the 2025 Act for carry-forward purposes.
Key Takeaways
- Always set off losses in the correct order: intra-head first, then inter-head, then brought-forward, then unabsorbed depreciation.
- File your return by the due date — missing it forfeits carry-forward rights for business, capital, and speculative losses.
- House property loss inter-head set-off is capped at ₹2,00,000 per year.
- Crypto/VDA losses are completely dead — no set-off against anything, no carry forward.
- Unabsorbed depreciation has the most favourable treatment: unlimited carry forward, any-head set-off, no filing deadline requirement.
- Companies must maintain 51% shareholding continuity (except listed companies and eligible startups).
For professional assistance with loss set-off claims or ITR filing, reach out to our team at Virtual Auditor or explore our income tax return filing services. For disputes regarding disallowed losses, see our penalties and interest guide and income tax appeal services.
Frequently Asked Questions
Can I set off a current-year business loss against salary income?
No. Business loss (whether speculative or non-speculative) cannot be set off against salary income under the Income Tax Act 2025. Non-speculative business loss can be set off against income from house property, capital gains, and other sources, but not salary. However, house property loss (up to ₹2 lakh) can be set off against salary income.
If I file a belated return, which losses can still be carried forward?
Only two types of losses can be carried forward even with a belated return: (1) house property loss, and (2) unabsorbed depreciation. All other losses — business loss, speculative loss, capital loss, and racehorse activity loss — require the return to be filed on or before the due date under Section 139(1) for carry forward eligibility.
Can I carry forward LTCG losses and set them off against STCG in a future year?
No. Long-term capital loss, whether current-year or brought-forward, can only be set off against long-term capital gains. It can never be set off against short-term capital gains or income under any other head. Short-term capital loss, however, can be set off against both STCG and LTCG.
What is the carry forward period for unabsorbed depreciation?
Unabsorbed depreciation can be carried forward indefinitely — there is no time limit. It can be set off against income under any head (not just business income), and its carry forward does not depend on whether the return was filed on time. This makes unabsorbed depreciation the most favourably treated category for carry-forward purposes.
If I have both current-year losses and brought-forward losses, which is set off first?
Current-year losses are always set off first. Only after the current year’s intra-head and inter-head set-offs are exhausted, brought-forward losses from earlier years are applied. Among brought-forward losses, the oldest year’s losses are set off first (FIFO basis). After all brought-forward losses, unabsorbed depreciation is set off last.
Can a loss from one cryptocurrency be set off against gains from another cryptocurrency?
No. Under the Income Tax Act 2025, loss from the transfer of any virtual digital asset (VDA) including cryptocurrency cannot be set off against gains from any other VDA. Each VDA transaction is independently taxed at 30% on gains, and losses simply lapse with no benefit. A loss on Bitcoin cannot offset a gain on Ethereum.
Does the 51% shareholding rule apply to listed companies?
No. Listed companies are exempt from the 51% shareholding continuity requirement. Since shares of listed companies trade freely on stock exchanges, imposing such a condition would be impractical. The 51% rule applies only to closely held (unlisted) companies. Eligible startups recognised by DPIIT also enjoy a relaxation of this rule.
How does the house property loss cap of ₹2 lakh work in practice?
If your total net loss under “Income from House Property” (after intra-head set-off between multiple properties) exceeds ₹2,00,000, only ₹2,00,000 can be set off against other heads in the current year. The excess loss beyond ₹2 lakh is carried forward for up to 8 assessment years and can be set off only against future house property income.
Can I set off brought-forward business losses against capital gains?
No. Brought-forward business losses can only be set off against business income in subsequent years. While current-year non-speculative business loss can be set off inter-head against capital gains, house property income, or other sources, once a business loss is carried forward it becomes restricted to business income only.
What is the difference between set-off and carry forward of losses?
Set-off is the adjustment of a loss against income in the same assessment year — either within the same head (intra-head) or across different heads (inter-head). Carry forward takes any remaining unadjusted loss to subsequent assessment years for future set-off, subject to type-specific time limits and conditions. Set-off happens first; carry forward is the fallback for unabsorbed losses.
