Set-Off and Carryforward Under Income Tax Act: Complete Guide 2025

 

Losses in business or investments are part and parcel of financial life. Thankfully, the Income Tax Act, 1961 recognizes this reality and provides taxpayers with powerful tools to optimize tax liability through set-off and carry forward of losses. These provisions allow you to adjust your losses against your income in the current or future years, reducing your taxable income and ensuring fair taxation.

This article explains what set-off and carry forward mean, the types of losses involved, key rules and recent 2025 updates, plus practical tips for effective tax planning.

 

What Is Set-Off of Losses?

Set-off is about adjusting losses against income within the same financial year. Say you have two sources of income under the business head—Business A incurred a loss, but Business B earned a profit. You can use Set-off provisions to cancel off the loss from A against profits from B, reducing your total taxable income.

Types of Set-Off

1. Intra-Head Set-Off (Section 70)

Losses from one source under a head of income can be set off against gains from another source within the same head. For example:

• Loss from Business A vs Profit from Business B under "Profits and Gains of Business or Profession"
• Loss from one house property can be adjusted against income from another
• Short-term capital loss can be set off against both short-term and long-term capital gains

2. Inter-Head Set-Off (Section 71)

If losses still remain after intra-head set-off, these can be adjusted against incomes from other heads, with some restrictions:

• Business loss cannot be set off against salary income
• Speculative business loss only against speculative income
• Capital loss cannot be set off against other heads of income
• Losses from owning race horses can only be adjusted against similar income

Carryforward of Losses

When you cannot adjust all losses in the current year because of low or no income, the balance losses can be carried forward to future assessment years to offset income in those years, subject to time limits.

Loss Type	Relevant Section	Carry Forward Period	Set-Off Against
Business (Non-Speculation)	Section 72	8 years	Business Income Only
Speculation Business	Section 73	4 years	Speculation Income Only
Short-Term Capital Loss	Section 74	8 years	Any Capital Gains
Long-Term Capital Loss	Section 74	8 years	Long-Term Capital Gains Only
House Property Loss	Section 71B	8 years	House Property Income Only
Unabsorbed Depreciation	Section 32(2)	Indefinite	Any Income Except Salary

 

Recent Amendments and Updates for 2025

Capital Loss Relief in New Income Tax Bill 2025

The newly drafted tax bill allows taxpayers a one-time transitional relief to set off accumulated long-term capital losses (incurred till March 31, 2026) against any capital gains from AY 2026-27 onwards. This is a shift from the earlier provision limiting set-off of long-term capital losses only against gains of the same type.

Merger and Amalgamation Restrictions

To prevent “evergreening” losses through repeated mergers, amendments now restrict carrying forward business losses only up to 8 years from when originally incurred by the predecessor. This applies to mergers effective April 1, 2025, stopping clock reset tricks.

New Tax Regime Implications

Under the new tax regime, house property losses cannot be set off against income from other sources—only intra-head set-off within house property income is allowed, which limits some tax planning possibilities compared to the old regime.

 

Filing and Compliance Conditions

• Filing Income Tax Returns within the prescribed due date is mandatory for carry forward of most losses
• For FY 2024-25, the deadline is extended to September 15, 2025
• Failure to file timely generally results in losing carry forward rights (except unabsorbed depreciation)
• Losses can only be carried forward by the same taxpayer who incurred them
• Shareholding changes beyond 51% in companies restrict the benefit of carry forward under Section 79
• Losses from exempt income or casual income (lottery, gambling) cannot be set off against taxable income
• Losses from undisclosed income detected during searches are disallowed from set-off per Section 79A

 

Strategic Tax Planning Tips

• Always file your returns before the due date to preserve loss benefits
• Classify losses correctly between speculative, non-speculative, capital, etc. to avoid disallowance
• Track ownership changes and restructuring impacts carefully
• Use carry forward provisions to optimally utilize losses when you have good income years

 

Practical Examples

Business Loss Set-Off

Mr. A runs two businesses:

• Business 1 loss: ₹5,00,000
• Business 2 profit: ₹7,00,000

After intra-head set-off, net business income is ₹2,00,000 taxable.

Capital Loss Carry Forward

Ms. B incurs:

• Short-term capital loss ₹1,00,000 in FY 2024-25
• Short-term capital gain ₹80,000 in FY 2025-26

₹80,000 STCL is set off against gain; balance ₹20,000 carried forward.

 

Common Pitfalls to Avoid

• Missing the return filing deadline — losing carry forward rights
• Misclassifying losses leading to denial of set-off
• Ignoring ownership continuity rules causing loss of business loss benefits
• Failure to keep adequate records and documentation for audits

 

Conclusion

Set-off and carry forward provisions under the Income Tax Act are powerful tools for tax optimization. The 2025 amendments offer new relief for capital losses but also tighten rules around mergers and house property loss claims.

To maximize benefits, it’s essential to file returns timely, maintain accurate records, and understand the complexities involved. Professional advice is recommended for businesses with multiple income sources or undergoing restructuring.

Stay updated on evolving laws, especially with the upcoming Income Tax Act reforms, to ensure smooth compliance and tax planning.