Introduction Inter Source adjustment (Intra-Head adjustment) [Sec. 108], Inter head adjustment [Sec. 109]

The Income-tax Act, 2025 provides rules for set-off of losses to determine the taxable total income of an assessee. A loss arising from one source may, subject to prescribed restrictions, be adjusted against income from another source under the same head or against income under another head. Section 108 deals with inter-source or intra-head adjustment, whereas Section 109 deals with inter-head adjustment. These provisions prevent taxation merely on positive income while ignoring eligible losses. However, certain losses, such as capital losses, speculation losses and specified losses, are subject to special restrictions.

1. Inter-Source Adjustment (Intra-Head Adjustment) [Section 108]

Section 108 deals with adjustment of loss from one source against income from another source falling under the same head of income. For example, a loss from one business may generally be adjusted against profit from another eligible business because both fall under Profits and Gains of Business or Profession. Similarly, eligible loss from one house property may be adjusted against income from another house property. However, the Act prescribes restrictions for certain losses. Capital loss, speculation business loss, specified business loss, race-horse loss and certain other losses can be adjusted only in the manner specifically permitted by the relevant provisions.

Illustration – Intra-Head Adjustment

Thus, the loss from Business B is adjusted against profit from Business A under the same head of income.

2. Inter-Head Adjustment [Section 109]

Section 109 provides for adjustment of an eligible loss under one head of income against income assessable under another head of income, after completing the intra-head adjustment under Section 108. For example, an eligible business loss may generally be adjusted against income under another permissible head, subject to statutory restrictions. However, certain losses cannot be freely adjusted across different heads. Capital losses are confined to capital gains, while losses from speculation business and other specified activities are governed by separate provisions. Further, the Act may restrict adjustment against salary income or prescribe monetary limits for particular losses. Unadjusted losses may be carried forward where permitted.

Illustration – Inter-Head Adjustment

Sequence of Adjustment: