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Income Tax · BusinessLoss carry-forward and set-off for businesses: worked examples
A loss this year can reduce tax for up to eight years – if you follow the set-off order and file your return on time. Here are the rules for business, speculative, capital and house property losses and unabsorbed depreciation, with worked examples.
Losses are a valuable tax asset. The Income-tax Act, 1961 (Sections 70 to 80) lays down how losses are set off within the same year and carried forward. The Income-tax Act, 2025 continues these rules, and its savings clause allows old losses to be used in later years.
Step 1: intra-head set-off (same head, same year)
Loss from one source is set off against income from another source under the same head. Exceptions:
- Speculative business loss only against speculative income.
- Long-term capital loss only against long-term capital gains.
- Loss from owning and maintaining race horses only against such income.
Step 2: inter-head set-off (other heads, same year)
| Loss | Can be set off against |
|---|---|
| House property loss | Any head, up to ₹2 lakh (old regime); not at all in the new regime |
| Non-speculative business loss | Any head except salary |
| Speculative loss | Only speculative income |
| Capital loss | Only capital gains (STCL against STCG/LTCG; LTCL against LTCG) |
Step 3: carry-forward
| Loss | Years | Set off against | Timely return needed? |
|---|---|---|---|
| Non-speculative business loss | 8 | Business income | Yes |
| Speculative loss | 4 | Speculative income | Yes |
| Specified business loss (35AD) | Indefinite | Specified business | Yes |
| Short-term capital loss | 8 | STCG or LTCG | Yes |
| Long-term capital loss | 8 | LTCG | Yes |
| House property loss | 8 | House property income | No |
| Unabsorbed depreciation | Indefinite | Any income (except salary) | No |
Order of set-off in later years
Brought-forward business loss is set off first, then unabsorbed depreciation (current depreciation first).
Worked example 1: trader with F&O and shares
Example: Mr Jain, a trader in Shalimar Bagh, has for FY 2025-26 (old regime):
| Item | Amount |
|---|---|
| Salary | ₹6,00,000 |
| Business income (trading) | ₹4,00,000 |
| F&O loss (non-speculative business) | ₹(7,50,000) |
| Intraday share loss (speculative) | ₹(80,000) |
| STCG on shares | ₹1,20,000 |
| House property loss (let-out) | ₹(2,60,000) |
Set-off: - F&O loss ₹7,50,000 against business income ₹4,00,000 → balance loss ₹3,50,000; set off against STCG ₹1,20,000 → balance ₹2,30,000 carried forward (cannot be set off against salary). - House property loss: ₹2,00,000 against salary; ₹60,000 carried forward. - Speculative loss ₹80,000 carried forward (4 years).
| Head | After set-off |
|---|---|
| Salary | ₹6,00,000 – ₹50,000 SD – ₹2,00,000 HP loss = ₹3,50,000 |
| Business | Nil |
| Capital gains | Nil |
| Carried forward | Business loss ₹2,30,000; speculative ₹80,000; HP ₹60,000 |
Mr Jain must file by the due date (31 July, or 31 October if audit applies) to keep the business and speculative losses.
Worked example 2: company with unabsorbed depreciation
Example: A private company had unabsorbed depreciation of ₹40 lakh and business loss of ₹25 lakh (FY 2021-22) brought forward. In Tax Year 2026-27, its business income before depreciation is ₹50 lakh and current depreciation ₹12 lakh.
- Income after current depreciation: ₹38 lakh.
- Set off brought-forward business loss of FY 2021-22: ₹25 lakh → ₹13 lakh.
- Set off unabsorbed depreciation: ₹13 lakh → nil. Balance unabsorbed depreciation ₹27 lakh carried forward indefinitely.
The FY 2021-22 loss had to be used by the eighth year (FY 2029-30); using it first is correct. The savings clause (Section 536) allows these old losses under the new Act.
New tax regime and losses
- Individuals in the new regime cannot set off house property loss against other heads, and cannot carry it forward.
- Companies under Section 115BAA cannot set off losses or unabsorbed depreciation attributable to additional depreciation and certain incentives.
Section 79 for closely held companies
If shares carrying more than 49% of voting power change hands, losses of earlier years lapse, except for eligible start-ups (where all original shareholders continue) and certain restructurings. Unabsorbed depreciation is not affected.
Practical tips
- Always file by the due date when there is any loss – even if no tax is payable.
- Keep a loss schedule (year of loss, amount, used, balance, expiry year).
- Report correctly in Schedule CFL of the ITR every year.
Key takeaway
Losses save tax only if set off in the right order and the return is filed on time. Track expiry years, and remember the new-regime restrictions on house property loss. Our income tax team maintains loss schedules for traders, F&O investors and companies.
Official references
Official sources to verify the current text, notifications and circulars:
Frequently asked questions
How long can a business loss be carried forward?
Eight assessment years immediately following the year of loss. It can be set off only against business income in those years.
Is filing the return on time necessary to carry forward a loss?
Yes, for business, speculative and capital losses. A belated return does not allow carry-forward of these losses. House property loss and unabsorbed depreciation can be carried forward even with a belated return.
Can business loss be set off against salary?
In the same year, a non-speculative business loss can be set off against income under any head except salary. Carried-forward business loss can be set off only against business income.
What happens to losses when the shareholding of a private company changes?
Under Section 79, a closely held company cannot carry forward losses if more than 49% of voting power changes hands, subject to exceptions (e.g. eligible start-ups).
Can a loss be carried forward if the return is filed after an extension?
Yes, if the return is filed within the due date as extended by CBDT, it is treated as filed on time.
Is unabsorbed depreciation lost if the return is late?
No. Unabsorbed depreciation can be carried forward even if the return is filed late; business losses cannot.
Can a firm carry forward loss after a partner retires?
Yes, a firm's loss is not lost merely because of change in partners, subject to specific rules on retirement or death of a partner.
This article is general information on the law as on 10 November 2026, written for educational purposes. It is not professional advice for your case. Section numbers under the Income-tax Act, 2025 should be confirmed with the official section mapping on the Income Tax Department website before use in filings.
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