Chapter 7: Set-off & Carry Forward of Losses
1. Intra-Head (Sec 70) & Inter-Head (Sec 71) Set-Off Matrix
| Source of Loss | Intra-Head Set-off (Sec 70) | Inter-Head Set-off (Sec 71) |
|---|---|---|
| Loss from House Property | Any house property income | Any head of income (Capped at ₹ 2,00,000 per year). |
| Normal Business Loss | Any business income (incl. speculation) | Any head of income EXCEPT Salaries. |
| Speculative Business Loss | Speculation profits ONLY | NO inter-head set-off |
| Specified Business Loss (Sec 35AD) | Sec 35AD profits ONLY | NO inter-head set-off |
| Short-Term Capital Loss (STCL) | STCG or LTCG | NO inter-head set-off |
| Long-Term Capital Loss (LTCL) | LTCG ONLY | NO inter-head set-off |
| Loss from Owning/Maintaining Race Horses | Race horse income ONLY | NO inter-head set-off |
2. Carry Forward Limitations & Timelines
| Nature of Loss | Max Carry Forward Period | Mandatory Return Filing u/s 139(1)? | Permitted Set-off in Subsequent Years |
|---|---|---|---|
| House Property Loss | 8 Assessment Years | No (can be carried forward even if belated) | House Property income only. |
| Business Loss | 8 Assessment Years | YES (mandatory u/s 80) | Business income only (active or passive). |
| Unabsorbed Depreciation | Indefinite | No (can be carried forward indefinitely) | Any income (except Salaries). |
| Speculation Loss | 4 Assessment Years | YES | Speculation profits only. |
| Capital Losses (STCL / LTCL) | 8 Assessment Years | YES | STCL against STCG/LTCG; LTCL against LTCG. |
| Race Horses Loss | 4 Assessment Years | YES | Race horses profits only. |
3. Section 79: Change in Shareholding of Closely-Held Companies
In the case of a company in which the public are not substantially interested, no loss incurred in any previous year shall be carried forward and set off UNLESS:
On the last day of the previous year, shares of the company carrying not less than 51% of the voting power were beneficially held by persons who held them on the last day of the year in which loss was incurred.
Eligible Startup Exception: Continues to carry forward loss even if 51% condition fails, PROVIDED all original shareholders continue to hold shares.
On the last day of the previous year, shares of the company carrying not less than 51% of the voting power were beneficially held by persons who held them on the last day of the year in which loss was incurred.
Eligible Startup Exception: Continues to carry forward loss even if 51% condition fails, PROVIDED all original shareholders continue to hold shares.
4. Priority Order of Set-Off against Business Profits
Order of Priority under Section 32(2) & Section 72:
1. Current year Depreciation u/s 32(1).
2. Current year Capital Expenditure on Scientific Research u/s 35(1).
3. Brought forward Business Losses u/s 72(1).
4. Unabsorbed Depreciation u/s 32(2).
1. Current year Depreciation u/s 32(1).
2. Current year Capital Expenditure on Scientific Research u/s 35(1).
3. Brought forward Business Losses u/s 72(1).
4. Unabsorbed Depreciation u/s 32(2).
5. High-Frequency Exam Traps
Trap 1: Business loss cannot be set off against Salary!
Section 71(2A) explicitly prohibits set-off of business loss (speculative or non-speculative) against Salary income under any circumstances.
Section 71(2A) explicitly prohibits set-off of business loss (speculative or non-speculative) against Salary income under any circumstances.
Trap 2: Belated return denies carry forward!
If return of income is filed after the due date specified u/s 139(1), business loss, speculation loss, capital loss, and race horses loss CANNOT BE CARRIED FORWARD u/s 80. However, House Property loss and Unabsorbed Depreciation ARE ALLOWED to be carried forward!
If return of income is filed after the due date specified u/s 139(1), business loss, speculation loss, capital loss, and race horses loss CANNOT BE CARRIED FORWARD u/s 80. However, House Property loss and Unabsorbed Depreciation ARE ALLOWED to be carried forward!