Set-Off and Carry-Forward of Losses in India: Rules and Errors
• By AskSolique.ai Team • Tax & Regulatory
Losses are set off first within the same head, then against other heads subject to restrictions, with the unabsorbed balance carried forward for a limited period. Carry-forward is conditional on filing the return within the due date, and for closely held companies, on continuity of beneficial shareholding.
The order of set-off
Intra-head first: a loss under a head is set off against income under the same head. Then inter-head, subject to restrictions.
Capital losses cannot be set off against income under other heads. Long-term capital losses can only be set off against long-term capital gains, while short-term capital losses can be set off against either long-term or short-term gains. Speculation losses and specified business losses can only be set off against income of the same nature.
Loss under house property is subject to a cap on inter-head set-off.
Carry-forward periods
Business losses, capital losses and house property losses are generally carried forward for eight assessment years. Speculation losses carry forward for four years. Unabsorbed depreciation is treated differently — it carries forward indefinitely and has different set-off rules.
Conflating unabsorbed depreciation with business loss is a frequent error, because the two have materially different treatment.
The conditions that forfeit carry-forward
Late filing. Carry-forward of business and capital losses requires the return to be filed within the due date. A return filed late preserves the current-year set-off but forfeits carry-forward. Unabsorbed depreciation is generally treated differently.
This is the single most expensive avoidable error in this area, and it is entirely procedural.
Change in shareholding. For closely held companies, carry-forward is forfeited where beneficial shareholding changes beyond a specified extent, subject to exceptions including relief for eligible startups.
This has direct consequences for funding rounds. A company with substantial accumulated losses raising a round that shifts beneficial ownership past the threshold can lose them — and the loss is often not modelled in the deal analysis.
Amalgamation and demerger. Carry-forward on reorganisation is available only where prescribed conditions are met.
Common errors
Setting off long-term capital loss against short-term gains. Missing the due date and forfeiting carry-forward. Ignoring the shareholding continuity test on a funding round. Treating unabsorbed depreciation as business loss. And failing to track loss balances by year, which matters because carry-forward expires year by year.
Related reading
- capital gains treatment — Capital Gains Under the Income-tax Act 2025
- scrutiny triggers — Income Tax Scrutiny Triggers for Growth-Stage Companies
- what diligence checks — Tax Due Diligence for Acquiring an Indian Target
Frequently Asked Questions
Can I carry forward losses if I file late?
Generally no for business and capital losses. Unabsorbed depreciation is treated differently.
Does a funding round affect accumulated losses?
For closely held companies, a change in beneficial shareholding beyond the threshold can forfeit carry-forward, subject to startup exceptions.
Can long-term capital loss be set off against business income?
No. Long-term capital losses can only be set off against long-term capital gains.
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