Set-Off & Carry Forward of Losses — Complete Guide

Losses aren’t just bad news at tax time — used correctly, they can meaningfully reduce your tax liability, this year or in future years. But the rules for what can be set off against what are specific and easy to get wrong.

Two Types of Set-Off

1.          Intra-head set-off: Setting off a loss from one source against income from another source within the same head (e.g., loss from one house property against income from another house property).

2.          Inter-head set-off: Setting off a loss from one head of income against income from a different head (e.g., business loss against salary income) — subject to specific restrictions.

Key Rules by Loss Type

Loss Type

Can Be Set Off Against

Carry Forward Period

House property loss

Any head of income, up to ₹2 lakh/year (old regime only)

8 years (against house property income only)

Business loss (non-speculative)

Any head except salary

8 years

Speculative business loss

Only speculative business income

4 years

Short-term capital loss

Any capital gains (STCG or LTCG)

8 years

Long-term capital loss

Only long-term capital gains

8 years

Loss from owning/maintaining race horses

Only race-horse income

4 years

VDA/crypto loss

Cannot be set off against anything, including other VDA gains

Cannot be carried forward

The Salary Exception

Business losses cannot be set off against salary income in the same year — this is one of the most commonly misunderstood restrictions. A person with both a salaried job and a loss-making side business cannot reduce their salary tax using the business loss in the current year (though the loss can still be carried forward against future business income).

Filing Deadline Matters — A Lot

To carry forward a loss (other than house property loss) to future years, you must file your ITR by the original due date — a belated return generally forfeits your ability to carry forward most losses (house property loss is an exception and can still be carried forward even with a belated return).

Example

A trader incurs a ₹5,00,000 business loss in FY 2025-26 but files a belated return in December instead of by the July due date. That ₹5,00,000 loss cannot be carried forward to offset future years’ profits — a costly consequence of missing the deadline, regardless of the reason for the delay.

Order of Set-Off

Within capital gains, short-term losses are typically set off first against short-term gains, then any remainder against long-term gains — following a specific statutory sequence designed to maximise the taxpayer’s overall benefit where flexibility exists.

Frequently Asked Questions

Q1. Can I set off my crypto loss against my stock market gains? No — VDA/crypto losses cannot be set off against any other income, including gains from other capital assets like stocks or property. This is a unique, strict rule specific to virtual digital assets.

Q2. If I don’t use my carried-forward loss this year, does it expire? It doesn’t expire until the maximum carry-forward period (typically 8 years, or 4 years for speculative/race-horse losses) is exhausted — but it must be used against the first available eligible income within that window; you can’t selectively skip years.

Q3. Does an unabsorbed depreciation loss also have an 8-year limit? No — unabsorbed depreciation is treated more favourably and can generally be carried forward indefinitely, unlike most other business losses which are capped at 8 years.

Reflects the general loss set-off and carry-forward framework applicable for Tax Year 2026-27.