Taxpayers and businesses may not always have taxable profits in every financial year. In such situations, the Income-tax Act, 2025 provides rules that determine how eligible losses can be adjusted against income and, where the loss remains unadjusted, carried forward to future years.
The Income Tax Department's latest explanatory material on set-off and carry forward of losses covers important rules relating to intra-head adjustment, inter-head adjustment, business losses, speculative losses, house property losses, capital losses and unabsorbed depreciation. The document also highlights several situations where losses cannot be adjusted against particular types of income.
What is Intra-Head Adjustment?
An intra-head adjustment takes place when a loss from one source under a particular head of income is adjusted against income from another source under the same head.
For example, a loss from one business can generally be adjusted against profit from another business under the same head, subject to the prescribed restrictions.
However, taxpayers need to check the specific restrictions before claiming such an adjustment.
For instance, speculative business losses cannot generally be set off against non-speculative income. Similarly, long-term capital loss can be adjusted only against long-term capital gains, while short-term capital loss can be adjusted against both short-term and long-term capital gains.
Losses connected with lottery winnings, gambling, betting and certain other specified activities also face restrictions. Loss from the business of owning and maintaining race horses, for example, can be adjusted only against income from that specified business.
What is Inter-Head Adjustment?
After making the applicable intra-head adjustments, a taxpayer may be able to make an inter-head adjustment.
This means adjusting a loss under one head of income against income under another head. The document gives the example of a house property loss being adjusted against salary income, subject to the applicable restrictions.
There are, however, important limitations. Capital losses cannot be adjusted against income under other heads, while business or professional losses cannot be set off against salary income.
House property loss is also subject to a specific restriction. The loss can generally be set off against other heads only up to ₹2 lakh in a tax year. Further, an assessee opting for the new tax regime under section 202 cannot set off a house property loss against income under another head.
What Happens When Loss Cannot Be Fully Adjusted?
If a taxpayer is unable to completely adjust a loss during the year in which it arises, the remaining amount may, subject to the applicable conditions, be carried forward to subsequent years.
Different types of losses have different rules regarding the period for which they can be carried forward and the income against which they can subsequently be adjusted.
Business Loss
A non-speculative business or professional loss that remains unadjusted can generally be carried forward and set off in subsequent years against income under the head “Profits and gains of business or profession.”
The return of income or loss for the year in which the loss is incurred must be furnished on or before the prescribed due date for the loss to be carried forward. Such loss can generally be carried forward for eight years immediately succeeding the year in which it was incurred.
Speculative Business Loss
Speculative business losses follow a separate rule. An unadjusted speculative loss can be carried forward and set off only against income from speculative business.
The loss can be carried forward for four years immediately succeeding the year in which it was incurred, subject to the prescribed return-filing requirement.
House Property Loss
An unadjusted house property loss can be carried forward to subsequent years and set off against income chargeable under the head “Income from house property.”
The document provides for a carry-forward period of eight years. It also states that the loss can be carried forward even where the return was not furnished by the prescribed due date. However, taxpayers opting for the new tax regime under section 202 cannot carry forward house property loss that remains unabsorbed in the year in which it arises.
Capital Loss
Unadjusted capital loss can also be carried forward for eight years. In subsequent years, it can be adjusted only against income chargeable under the head “Capital gains.”
The nature of the capital loss remains important: long-term capital loss can be adjusted only against long-term capital gains, whereas short-term capital loss can be adjusted against both long-term and short-term capital gains. The prescribed return-filing condition also applies for carrying forward the loss.
How is Unabsorbed Depreciation Treated?
The rules also cover unabsorbed depreciation and certain unabsorbed capital expenditure relating to scientific research and family planning.
Where the available income is insufficient to absorb the allowable depreciation or specified expenditure, the unabsorbed amount can be carried forward and added to the corresponding allowance of the following year, subject to the applicable provisions.
The document specifies an order of priority for adjustments:
- Current scientific research expenditure, family planning expenditure and current depreciation
- Brought-forward business loss
- Unabsorbed depreciation and specified unabsorbed capital expenditure
Special Rules When Business Constitution or Shareholding Changes
The law also contains specific provisions for carrying forward losses following changes in the constitution of a business, such as amalgamation, demerger or conversion of certain business structures, subject to prescribed conditions.
Special restrictions also apply when a partner retires or dies in a partnership firm. Under section 119(1), the proportionate loss attributable to the outgoing partner, to the extent specified in the provision, cannot be carried forward by the firm. The restriction applies to loss and not to unabsorbed depreciation or specified unabsorbed capital expenditure.
For certain closely held companies, section 119(3) introduces conditions relating to continuity of shareholding before brought-forward losses can be carried forward and set off. For companies that are not eligible start-ups, a 51% voting-power continuity condition is relevant, while eligible start-ups are subject to additional conditions specified in the law.
Losses Cannot Be Set Off Against Certain Undisclosed Income
Another important restriction concerns undisclosed income detected during search, requisition or survey proceedings.
Where an assessee's total income includes undisclosed income detected through the specified proceedings, the document states that brought-forward or current losses and unabsorbed depreciation cannot be set off against such undisclosed income while computing total income for that tax year.
Key Takeaway for Taxpayers
The rules for set-off and carry forward of losses are not uniform across all categories of income. The nature of the loss, head of income, type of business, filing of the return and applicable tax regime can all affect whether a loss can be adjusted or carried forward.
Taxpayers should therefore identify the type of loss first and then check the specific set-off and carry-forward conditions applicable to it. In particular, business losses, speculative losses, house property losses and capital losses have different treatment and time limits.
The Income Tax Department's document also includes multiple MCQs explaining these provisions, making it useful as a quick reference for taxpayers and tax professionals studying the loss set-off provisions under the Income-tax Act, 2025.
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