Set Off & Carry Forward of Losses: 2025 Income Tax Rules

Set Off and Carry Forward of Losses under the Income Tax Act, India (2025 Update)

Let’s face it—profit years are great, but losses? Not so much. Still, if you’re running a business or earning from multiple sources, losses are bound to show up now and then. The good news is that the Income Tax Act, 1961, doesn’t just shrug them off. It actually gives you solid ways to deal with them. This updated 2025 guide (yes, including the latest Income Tax Bill changes) breaks down how set off and carry forward of losses work—without the jargon.

First Things First: What Are We Talking About?

Set off simply means adjusting your losses against your income in the same assessment year.

Carry forward means pushing those leftover losses to the next few years so you can adjust them against future profits—basically giving those losses a second chance.

The Two Kinds of Set Off

Intra-head Set Off: Let’s say you have two businesses—one earned a profit, the other made a loss. You can set off the loss against the profit. This is called intra-head because both fall under the same head: business income.

But watch out for the fine print. Losses from speculative business, capital loss, and owning race horses have their own separate rules.

Inter-head Set Off: After you’ve set off what you can within a head, you might still have some leftover losses. You can try setting that off against other heads of income. For instance, if your business ran into a loss but you earned from a house property, inter-head set off can help.

Again, there are boundaries. Speculative business loss, capital loss, and race horse business loss can’t be set off against other heads. Sorry, no mixing and matching here.

Carry Forward of Losses: The Real Deal (2025 Rules)

Here’s where it gets technical, but hang in there.

House Property Loss: You can adjust this only against income from house property. However, you can also set off up to ₹2 lakh per year against other heads. Anything beyond that gets carried forward for up to 8 years. The best part? You can carry it forward even if you file your return late.
Non-Speculative Business Loss: You can set it off only against income from business or profession. Salary or capital gains? Not allowed. The loss sticks around for 8 years, but only if you file your return on time. No need to keep the same business running—continuity isn’t required.
Speculative Business Loss: This loss is a little stricter. You can only set it off against speculative business income and you’ve got just 4 years to do it. Filing your return on time is a must.
Specified Business Loss (Section 35AD): Only allowed to be set off against income from specified businesses. There’s no time cap here, but again—you need to file that return by the due date.
Capital Losses: Normally, short-term capital losses (STCL) can be set off against both short- and long-term gains. Long-term capital losses (LTCL) are more limited—they can only be set off against long-term gains.
But here’s a game-changer: Under the Income Tax Bill 2025, if you suffer a capital loss up to 31 March 2026, you’ll be allowed to set it off against any type of capital gains—including STCG—from FY 2026–27 onward. Big win for taxpayers.
Race Horse Income Losses: Only allowed to be set off against the same income (from owning and maintaining race horses). Time limit? 4 years. You’ll need to keep the business running and file your return on time.
Unabsorbed Depreciation: Probably the most flexible of the bunch. Can be adjusted against income under any head (except salary), and it can be carried forward indefinitely. Also, no penalty for filing late.

What Changed in 2024–2025?

Here are the latest updates that matter:

Capital Loss Set Off Relaxation: Losses incurred up to March 31, 2026, can now be adjusted against any capital gains (including short-term) from FY 2026–27. It’s a one-time relief under the 2025 Bill.
House Property Loss Cap: You can still set off up to ₹2 lakh per year against other heads, and the rest can be carried forward for up to 8 years.
Unabsorbed Depreciation: No expiry. No rush. File whenever, and carry it forward forever.
Late Filing Rules: Only house property loss and unabsorbed depreciation can be carried forward if you miss the ITR deadline. For all other losses, your return must be filed on time under Section 139(1).
Losses in Amalgamations: You now have just 8 years from the original year of loss to carry it forward. The clock doesn’t reset if your business gets amalgamated.
Default Tax Regime Now Active: From AY 2024–25, the new tax regime is the default for individuals, HUFs, AOPs, and BOIs. But relax—rules around loss set off and carry forward remain the same.