Set-Off & Carry Forward of Losses Under the Income-tax Act, 2025

Last Updated: 15 April 2026  |  Applicable From: Tax Year 2026-27 (1 April 2026 onwards)  |  Reference: Income-tax Act, 2025 (30 of 2025), as amended by Finance Act, 2026

Losses are an unavoidable reality of running a business, managing a property portfolio, or investing in equities, real estate, or digital assets. The tax law recognises this by permitting losses to be set off against other income in the same year and, where that is insufficient, carried forward to be adjusted against future income of a similar kind. But the rules are not unlimited — there are head-specific restrictions, time-specific caps, documentation requirements, and an entire category (VDAs) where no relief is available at all. A taxpayer who navigates these rules correctly can turn a painful loss year into a valuable tax asset; a taxpayer who does not will simply leave money on the table.

This guide walks through every loss rule under Chapter VII of the Income-tax Act, 2025 — which received presidential assent on 21 August 2025 and commenced on 1 April 2026 — with comparative tables, worked examples, and the critical transitional treatment of losses brought forward from years prior to 1 April 2026.

Table of Contents

1. Chapter VII framework and transition from 1961 Act
2. Intra-head set-off
3. Inter-head set-off and its restrictions
4. House property loss — the ₹2 lakh cap
5. Business loss — normal and speculation
6. Unabsorbed depreciation
7. Capital losses — LTCL, STCL, listed vs unlisted
8. VDA (cryptocurrency) loss — no set-off, no carry-forward
9. Return filing condition for carry-forward
10. Change in shareholding — the 79 equivalent
11. Transitional carry-forward from pre-2026 years
12. Worked examples
13. Expert Insight
14. Key Takeaways
15. Frequently Asked Questions

1. Chapter VII framework and transition from the 1961 Act

Chapter VII of the Income-tax Act, 2025 (sections 171–182) is titled “Set Off, or Carry Forward and Set Off of Losses”. It is the direct successor to Chapter VI of the Income-tax Act, 1961 (sections 70–80). The substantive architecture — head-specific set-off rules, carry-forward periods, and conditions for availing carry-forward — has been retained with simplified drafting. The VDA restriction, introduced by Finance Act, 2022 into section 115BBH of the 1961 Act, has been absorbed as a standalone restriction in the 2025 Act.

The 2025 Act commences on 1 April 2026. For the tax year 2026-27 (1 April 2026 to 31 March 2027) and every subsequent tax year, Chapter VII of the 2025 Act governs set-off and carry-forward. For losses brought forward from years prior to 1 April 2026, Chapter XXIII (Repeal and Savings) of the 2025 Act provides that such losses continue to be eligible for set-off and carry-forward under the equivalent provisions of the new Act, subject to the same residual period and conditions that would have applied under the 1961 Act.

2. Intra-head set-off

Intra-head set-off is the first step. A loss from one source under a head is adjusted against income from another source under the same head, before any inter-head adjustment is attempted. Examples:

• Loss from House A set off against rental income from House B (both under ‘Income from House Property’).
• Loss from Business X set off against profit from Business Y (both under ‘Profits and Gains of Business or Profession’).
• Short-term capital loss on Share A set off against short-term capital gain on Share B (both under ‘Capital Gains’).

Two important exceptions to the free flow of intra-head set-off:

1. Speculation loss can be set off only against speculation income, even within the same head.
2. Long-term capital loss can be set off only against long-term capital gains — not against short-term capital gains, even though both are within the same head.

3. Inter-head set-off and its restrictions

After intra-head set-off, any remaining loss under a head is set off against income under other heads, subject to the following restrictions:

Loss under head	Inter-head set-off permitted against	Key restriction
House Property	Any other head (salary, PGBP, capital gains, IFOS)	Capped at ₹2,00,000 per tax year
Business (non-speculative)	Any head except Salaries	Not against salary
Speculation Business	No inter-head set-off	Only against speculation income
Capital Gains (STCL / LTCL)	No inter-head set-off	LTCL only against LTCG; STCL against STCG or LTCG
Income from Other Sources (general)	Any other head	Casual income losses (lottery, gambling) not allowed at all
Owning/maintaining race horses	No inter-head set-off	Only against race-horse income
VDA (crypto/NFT) loss	None — complete prohibition	No set-off, no carry-forward

4. House property loss — the ₹2 lakh cap

Home loan interest is the biggest driver of house property losses. Where the interest payable on borrowed capital exceeds the annual value (rental income less deductions), the house property yields a loss. Under the 2025 Act:

• Intra-head set-off — unlimited. Loss from one house set off against income from another.
• Inter-head set-off — capped at ₹2,00,000 per tax year.
• Carry forward — up to 8 tax years, intra-head only (against house property income).

Under the new regime (default under the 2025 Act), the position is stricter — home loan interest for a self-occupied property is not deductible at all, and the inter-head set-off of house property loss against other heads is not permitted. Taxpayers who rely heavily on home loan interest deduction therefore need to model whether the old regime is more beneficial.

5. Business loss — normal and speculation

Normal business loss

Loss under the head ‘Profits and Gains of Business or Profession’ (PGBP), other than speculation business, is set off first intra-head, then inter-head against any head except salary, and any residual is carried forward for 8 tax years. In carry-forward years, it can be set off only against business income — not against any other head.

Speculation business loss

Speculation business is defined (like in the 1961 Act) as a business in which contracts for purchase or sale of any commodity, including stocks and shares, are periodically or ultimately settled otherwise than by actual delivery or transfer. Under the 2025 Act:

• Intra-head set-off — only against speculation income.
• Inter-head set-off — not permitted.
• Carry forward — up to 4 tax years, only against speculation income.

Specified business (35AD equivalent)

Loss from a specified business (cold chain, warehousing, hospital, etc.) can be set off only against income from any specified business (intra-head), and carried forward indefinitely against specified business income.

6. Unabsorbed depreciation

Depreciation allowance under the 2025 Act equivalent of section 32 is first claimed against business income. If the business income is insufficient, the unabsorbed portion can be:

• Set off against income under any head (except salary) in the same year;
• Carried forward indefinitely, with no year cap;
• Used in future years against income under any head except salary.

This indefinite carry-forward is the most generous loss treatment in the entire Act, and is the reason tax planners prefer to time additions to the block of assets carefully so that depreciation is captured even in loss years.

7. Capital losses — STCL, LTCL, listed vs unlisted

Type	Set-off in same year	Carry-forward period	Carry-forward set-off against
Short-Term Capital Loss (STCL)	STCG + LTCG	8 tax years	STCG + LTCG
Long-Term Capital Loss (LTCL)	LTCG only	8 tax years	LTCG only

Capital losses can never be set off against non-capital income — this is an absolute inter-head prohibition. The LTCL only against LTCG rule applies both in the year of loss and in carry-forward years.

8. VDA (cryptocurrency/NFT) loss — the complete prohibition

Losses from the transfer of Virtual Digital Assets (VDAs) — cryptocurrencies, NFTs and any other digital assets notified by the Central Government under the 2025 Act equivalent of section 2(111) — are subject to the strictest treatment in the entire Act:

• No intra-head set-off — loss on one VDA cannot even be set off against gain on another VDA.
• No inter-head set-off — not against salary, business income, capital gains, or anything else.
• No carry-forward — the loss is permanently extinguished in the tax year in which it arises.

This harsh treatment applies whether the VDA was held as an investment or as stock-in-trade, and whether the transferor is an individual, a HUF or a company. For a deeper dive, see our companion article on Cryptocurrency & VDA Taxation Under the 2025 Act.

9. Return filing condition for carry-forward

A critical requirement under the 2025 Act is that the return for the year of loss must be filed within the due date prescribed under the equivalent of section 139(1) — i.e., 31 July (non-audit) or 31 October (audit) following the tax year. A belated return loses the right to carry forward business loss, speculation loss, specified business loss, capital losses and loss from race horses.

Two notable exceptions:

• House property loss — can be carried forward even if the return is filed belatedly.
• Unabsorbed depreciation — also not subject to the timely-filing condition; it can be carried forward even on a belated return.

10. Change in shareholding — the 79 equivalent

For closely-held companies, the 2025 Act equivalent of section 79 restricts carry-forward of losses where the shareholding changes. A closely-held company cannot carry forward and set off a loss incurred in an earlier year unless shareholders holding at least 51% of voting power on the last day of the year of loss continue to beneficially hold such shares on the last day of the year of set-off.

Specific exceptions:

• Eligible startups under the 2025 Act equivalent of section 80-IAC enjoy a relaxed condition — loss can be carried forward if either the 51% continuity test or a 100% continuity of original shareholders (within the 10-year window) is met;
• Change in shareholding pursuant to a resolution plan approved under the Insolvency and Bankruptcy Code, 2016 is not treated as a disqualifying change;
• Death of a shareholder or transfer by way of gift to a relative is not a disqualifying change.

11. Transitional carry-forward from pre-2026 years

Under Chapter XXIII of the 2025 Act, losses determined under the Income-tax Act, 1961 that are available for carry-forward as on 31 March 2026 are deemed to be losses under the equivalent provisions of the 2025 Act, and can be carried forward and set off in the tax year 2026-27 and later, subject to the balance of the 8-year/4-year/indefinite window that would have been available under the 1961 Act.

This continuity ensures that taxpayers do not lose the economic value of pre-commencement losses merely because the law has been replaced. Importantly, the conditions attached — such as the return-filing condition — are deemed to have been satisfied if they were satisfied under the 1961 Act in the year of loss.

12. Worked examples

Related reading across the 214–243 series

• Cryptocurrency & VDA Taxation Under the 2025 Act — deep dive into the VDA regime.
• Capital Gains Tax Under the 2025 Act — companion piece on capital gains computation.
• Income Tax Penalties & Interest — on consequences of errors in loss utilisation.
• Income Tax Appeals Procedure — for disputes on loss carry-forward entitlement.
• Income from House Property — on the computation of house property loss.
• Profits & Gains of Business or Profession — on business loss computation.

Expert Insight

Key Takeaways

• Chapter VII of the Income-tax Act, 2025 (assented 21 August 2025, commenced 1 April 2026) governs set-off and carry-forward of losses for tax year 2026-27 onwards.
• Three-step waterfall: intra-head → inter-head → carry-forward.
• House property loss — inter-head set-off capped at ₹2 lakh; carry-forward 8 years, intra-head only.
• Business loss (non-speculative) — 8 years carry-forward; cannot reduce salary income.
• Unabsorbed depreciation — indefinite carry-forward, against any head except salary.
• Speculation loss — 4 years carry-forward, only against speculation income.
• STCL — 8 years, set off against STCG or LTCG; LTCL — 8 years, only against LTCG.
• VDA losses — no set-off, no carry-forward.
• Return must be filed within the due date to carry forward most losses — house property loss and unabsorbed depreciation are the exceptions.
• Closely-held companies must preserve 51% shareholder continuity to carry forward losses, with startup and IBC exceptions.
• Pre-commencement losses continue seamlessly under Chapter XXIII transitional provisions with the residual period preserved.

Frequently Asked Questions

Need help modelling your carry-forward position for the tax year 2026-27 or planning regime choice? Speak to CA V. Viswanathan at Virtual Auditor — +91 99622 60333 or support@virtualauditor.in.