Set-Off and Carry-Forward of Losses in India: Rules and Errors

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