Tag: Set Off Loss

Management Notes

Carry Forward and Set off of Losses from Activity of owning and Maintaining Race Horses [Sec. 115]

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Section 115 of the Income-tax Act, 2025 provides special rules for the carry forward and set-off of losses from the activity of owning and maintaining race horses. Where the assessee incurs a loss from this activity and it cannot be completely adjusted against eligible income from the same activity during the relevant tax year, the unabsorbed loss may be carried forward. Such loss is ring-fenced and cannot be freely adjusted against income from salary, house property, ordinary business, capital gains or other unrelated sources. The carried-forward loss can be adjusted only against income from the same specified activity, subject to statutory conditions.

1. Meaning of Loss from Owning and Maintaining Race Horses

A loss from the activity of owning and maintaining race horses arises where the allowable expenditure incurred on the specified activity exceeds the income derived from it during the relevant tax year. The activity must involve the assessee’s ownership and maintenance of race horses and must satisfy the conditions prescribed under the Act. Expenses connected with maintaining eligible race horses are considered according to the applicable computation provisions. Where the final result is a loss, special rules apply because such loss is not treated in the same manner as an ordinary business loss. Section 115 specifically governs its carry forward and subsequent set-off.

2. Set-off of Race-Horse Loss

Under Section 115, a loss arising from the activity of owning and maintaining race horses can be set off only against income from the activity of owning and maintaining race horses. It cannot be adjusted against ordinary business profits, salary, house-property income, capital gains or unrelated income from other sources. This restriction creates a separate category for race-horse losses and prevents such losses from reducing other taxable income of the assessee. Where sufficient income from the specified activity is available, the eligible loss may be absorbed against that income. Any balance remaining after the permissible adjustment may be carried forward according to Section 115.

3. Carry Forward of Race-Horse Loss

Where the loss from owning and maintaining race horses cannot be wholly set off during the relevant tax year, Section 115 permits the eligible unabsorbed amount to be carried forward to subsequent tax years. In a later year, the brought-forward loss can be adjusted only against income arising from the activity of owning and maintaining race horses. Its character does not change merely because it has been carried forward. If sufficient eligible income is unavailable in a subsequent year, the remaining loss may continue to be carried forward within the statutory period. Thus, Section 115 maintains the ring-fenced treatment of such losses across tax years.

4. Period of Carry Forward

Loss from the activity of owning and maintaining race horses may be carried forward for a maximum of four tax years immediately succeeding the tax year for which the loss was first computed. During this period, the brought-forward loss can be set off only against eligible income from the same specified activity. Where only part of the loss is absorbed in a subsequent year, the remaining balance may continue to be carried forward within the original four-year period. After expiry of the prescribed period, any unabsorbed loss ordinarily lapses. Therefore, the assessee should maintain proper year-wise records of the loss, set-off and balance carried forward.

5. Conditions for Carry Forward and Set-off

To obtain the benefit of carry forward and set-off under Section 115, the assessee must satisfy the conditions prescribed under the Income-tax Act, 2025. The loss must arise from the qualifying activity of owning and maintaining race horses and must be properly determined under the applicable computation provisions. Compliance with the relevant return-filing and loss-determination requirements is also important for preserving the right to carry forward the loss. In subsequent years, set-off is restricted exclusively to income from the same activity. Accordingly, proper documentation of income, eligible expenditure and previous losses is necessary to establish the amount available for future adjustment.

illustration

Suppose an assessee earns ₹2,00,000 from the activity of owning and maintaining race horses but incurs allowable expenditure of ₹5,00,000.

Particulars Amount (₹)
Income from Race-Horse Activity 2,00,000
Less: Allowable Expenditure (5,00,000)
Loss from Race-Horse Activity (3,00,000)
Current-year eligible set-off available Nil
Loss carried forward u/s 115 3,00,000

If the assessee earns ₹1,20,000 from the same activity in the following tax year:

Particulars Amount (₹)
Income from Race-Horse Activity 1,20,000
Less: Brought-forward Loss (1,20,000)
Taxable Income Nil
Balance Loss carried forward 1,80,000

The remaining ₹1,80,000 may continue to be carried forward within the prescribed four-tax-year limit.

Management Notes

Carry Forward and Set off of Capital Loss [Sec. 111]

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Section 111 of the Income-tax Act, 2025 provides rules for the carry forward and set-off of capital losses that cannot be completely adjusted under the intra-head adjustment provisions of Section 108. Capital losses are divided into short-term capital loss (STCL) and long-term capital loss (LTCL), and different set-off restrictions apply to each. Short-term capital loss can be adjusted against both short-term and long-term capital gains, whereas long-term capital loss can be adjusted only against long-term capital gains. Any eligible unabsorbed capital loss may be carried forward for a maximum of eight tax years, subject to statutory conditions.

1. Set-off of Short-Term Capital Loss

A short-term capital loss (STCL) arises from the transfer of a short-term capital asset where the allowable cost and transfer-related deductions exceed the consideration received or accruing. Under Section 111, a brought-forward short-term capital loss can be set off against income under the head Capital Gains arising from any capital asset. Therefore, it may be adjusted against either short-term capital gain (STCG) or long-term capital gain (LTCG). It cannot, however, be adjusted against salary, house-property income, business income or income from other sources. Any eligible STCL remaining unabsorbed may continue to be carried forward within the prescribed period.

2. Set-off of Long-Term Capital Loss

A long-term capital loss (LTCL) arises where computation relating to a long-term capital asset results in a loss. Section 111 imposes a stricter restriction on its adjustment. A brought-forward long-term capital loss can be set off only against long-term capital gains arising from another long-term capital asset. It cannot be adjusted against short-term capital gains, even though both amounts fall under the head Capital Gains. Further, it cannot be adjusted against income under any other head. Where the available long-term capital gain is insufficient to absorb the entire loss, the remaining eligible loss may be carried forward to subsequent tax years.

3. Carry Forward of Capital Loss

Where a capital loss cannot be wholly set off against eligible capital gains, Section 111 permits the unabsorbed capital loss to be carried forward to the following tax year. In subsequent years, its original character continues to apply: brought-forward STCL may be adjusted against STCG or LTCG, whereas brought-forward LTCL may be adjusted only against LTCG. If the loss is not fully absorbed in one subsequent year, the remaining amount may again be carried forward, subject to the statutory time limit. Capital loss remains ring-fenced within the Capital Gains head and cannot be used to reduce income taxable under other heads.

4. Period of Carry Forward

Under Section 111(2), an eligible capital loss cannot be carried forward for more than eight tax years immediately succeeding the tax year for which the loss was first computed. The eight-year period applies separately to the loss arising in each tax year. If part of the loss is set off during any subsequent year, only the remaining balance continues to be carried forward within the original eight-year period. After expiry of this period, any unabsorbed capital loss ordinarily lapses and cannot be adjusted in later years. Therefore, year-wise records of STCL, LTCL, utilisation and remaining balances should be properly maintained.

Set-off Rules at a Glance

Type of Capital Loss Can be Set off Against STCG Can be Set off Against LTCG Carry Forward
Short-Term Capital Loss (STCL) Yes Yes 8 Tax Years
Long-Term Capital Loss (LTCL) No Yes 8 Tax Years

illustration

Suppose an assessee has STCL of ₹2,00,000, LTCL of ₹1,50,000, STCG of ₹1,20,000 and LTCG of ₹1,00,000.

Particulars Amount (₹)
STCL 2,00,000
Less: Set-off against STCG (1,20,000)
Balance STCL 80,000
Less: Set-off against LTCG (80,000)
Balance STCL Nil
LTCG remaining 20,000
LTCL available 1,50,000
Less: Set-off against remaining LTCG (20,000)
LTCL carried forward 1,30,000

Thus, ₹1,30,000 LTCL remains to be carried forward and can be set off only against future long-term capital gains, within the eight-tax-year limit.

Management Notes

Carry Forward and Set off of Loss from Specified Business Covered u/s 35AD [Sec.114]

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Section 114 of the Income-tax Act, 2025 provides special rules for the set-off and carry forward of losses from specified business. These businesses receive separate treatment because losses arising from them are subject to a ring-fencing rule and cannot generally be adjusted against ordinary business income or income under other heads. Where a loss from a specified business cannot be completely set off during the relevant tax year, the unabsorbed amount may be carried forward to subsequent tax years. The provision ensures that such losses are adjusted only against profits and gains arising from an eligible specified business, subject to statutory conditions.

1. Meaning of Loss from Specified Business

A specified business loss arises where the allowable expenditure and deductions of a business classified as a specified business under the Act exceed the income earned from that business during the tax year. Such businesses are given special tax treatment and their losses are governed separately from ordinary business losses. The loss is first determined according to the applicable provisions for computing profits and gains of the specified business. Once determined, it cannot generally be freely adjusted against income from ordinary business, salary, house property, capital gains or other sources. Section 114 therefore creates a separate mechanism for adjustment of such specified-business losses.

2. Set-off of Specified Business Loss

Under Section 114, a loss arising from a specified business can be set off only against profits and gains of another specified business carried on by the assessee. It cannot be adjusted against profits from an ordinary non-specified business merely because both incomes fall under the broad head Profits and Gains of Business or Profession. Similarly, the loss cannot ordinarily be set off against income chargeable under other heads. This restriction is commonly described as ring-fencing of losses. If the assessee carries on more than one specified business, a loss from one eligible specified business may be adjusted against profits from another specified business, subject to statutory conditions.

3. Carry Forward of Specified Business Loss

Where the loss from a specified business cannot be wholly set off during the relevant tax year, the unabsorbed loss may be carried forward to subsequent tax years in accordance with Section 114. In a subsequent year, the brought-forward loss can be adjusted only against profits and gains arising from a specified business. It does not become an ordinary business loss merely because it has been carried forward. If sufficient specified-business profit is unavailable in a particular subsequent year, the remaining eligible loss may continue to be carried forward according to the Act. Thus, the special character of the loss is maintained until it is absorbed.

4. Period of Carry Forward

A significant feature of the provisions relating to specified-business loss is the treatment of the period for which an eligible loss may be carried forward. Unlike an ordinary business loss, which is subject to a prescribed limited carry-forward period, specified-business loss is governed by the special rules contained in Section 114. Subject to satisfaction of the applicable statutory conditions, the loss may continue to be carried forward until it can be absorbed against eligible profits of a specified business. Therefore, maintaining proper records of the year of loss, amount carried forward and subsequent set-off is important for determining the remaining loss available for adjustment.

5. Restriction on Inter-Head Adjustment

Loss from a specified business is subject to a strict restriction regarding inter-head adjustment. Such loss cannot ordinarily be set off against salary income, income from house property, capital gains or income from other sources. It also cannot generally be adjusted against profit from an ordinary business that does not qualify as a specified business. The purpose of this restriction is to ensure that special deductions and benefits associated with specified businesses do not reduce unrelated taxable income. Consequently, the loss remains attached to the specified-business category and is available for adjustment only against eligible specified-business profits, whether arising in the same year or subsequent years.

illustration

Suppose an assessee has the following income and loss:

Particulars Amount (₹)
Profit from Ordinary Business 6,00,000
Profit from Specified Business A 2,00,000
Loss from Specified Business B (5,00,000)
Loss set off against Specified Business A 2,00,000
Balance Specified-Business Loss carried forward 3,00,000

The ₹3,00,000 balance loss cannot be adjusted against the ₹6,00,000 profit from the ordinary business. It remains available for set-off against eligible specified-business profits in subsequent tax years, subject to Section 114.

Management Notes

Set off and Carry forward of Unabsorbed Depreciation, Carry forward and Set off of Speculation Loss [Sec. 113]

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The Income-tax Act, 2025 permits eligible business losses and depreciation that cannot be fully absorbed in a tax year to be adjusted according to prescribed rules. Unabsorbed depreciation arises when the depreciation allowance exceeds the income available for adjustment and is principally governed by Section 33(11). In contrast, Section 113 specifically governs the set-off and carry forward of speculation business losses. Speculation loss is ring-fenced and can be adjusted only against profits of another speculation business. The Act also prescribes different carry-forward rules and an order of priority where both speculation loss and depreciation relating to speculation business remain unabsorbed.

1. Set-off of Unabsorbed Depreciation

Unabsorbed depreciation arises when the depreciation allowance available to an assessee cannot be fully absorbed because the relevant income is insufficient. Under Section 33(11), the unabsorbed amount is carried forward and added to the depreciation allowance of the following tax year, subject to the provisions of the Act. It is therefore treated as part of the depreciation allowance available for the subsequent year. The rules governing unabsorbed depreciation are different from those applicable to ordinary business losses. Where depreciation relating to a speculation business and speculation loss are both carried forward, Section 113(4) requires priority to be given to the speculation-loss provisions.

2. Carry Forward of Unabsorbed Depreciation

Where the full depreciation allowance cannot be absorbed in the relevant tax year, the unabsorbed portion is carried forward according to Section 33(11). Unlike an ordinary business loss under Section 112, unabsorbed depreciation is governed by the special depreciation provision rather than the eight-year business-loss rule. The amount carried forward becomes part of the depreciation allowance available in the succeeding tax year and continues to receive the treatment prescribed by the Act. Therefore, business loss and unabsorbed depreciation should be maintained separately for tax computation. Where both amounts are available, the applicable statutory order of set-off must be followed while determining the assessee’s taxable business income.

Illustration – Unabsorbed Depreciation

Particulars Amount (₹)
Business Income before Depreciation 3,00,000
Less: Current Depreciation (4,50,000)
Income after Depreciation Nil
Unabsorbed Depreciation carried forward 1,50,000

Carry Forward and Set-off of Speculation Loss [Section 113]

3. Meaning and Set-off of Speculation Loss

A speculation loss is a loss computed in respect of a speculation business carried on by the assessee. Under Section 113(1), such loss is subject to a strict restriction: it can be set off only against profits and gains of another speculation business. It cannot be adjusted against profits from an ordinary non-speculative business or income chargeable under other heads merely because such income is available. This rule effectively keeps speculation losses separate from ordinary business losses. If sufficient speculation profit is available during the same tax year, the loss may be adjusted against it. Any remaining eligible loss is carried forward under Section 113(2).

4. Carry Forward of Speculation Loss

Where a speculation loss cannot be wholly adjusted against speculation profits during the tax year, Section 113(2) permits the unabsorbed amount to be carried forward to the following tax year. In that subsequent year, the brought-forward loss can again be set off only against profits and gains of a speculation business carried on by the assessee. If it is still not completely absorbed, the remaining amount may continue to be carried forward. However, Section 113(3) restricts such carry forward to four tax years immediately succeeding the tax year for which the speculation loss was first computed. Thereafter, the unabsorbed loss cannot be carried forward.

5. Priority over Depreciation

Section 113(4) specifies the order of adjustment where both a speculation loss and a carried-forward depreciation allowance relating to the speculation business are available. Where an allowance or part of an allowance under Section 33(11) or Section 45(7) relating to speculation business is to be carried forward, effect must first be given to the provisions of Section 113. Consequently, the eligible brought-forward speculation loss receives priority in the statutory sequence before the relevant carried-forward allowance is given effect. This ordering is important because speculation loss has a limited four-year carry-forward period, whereas depreciation is governed separately under the depreciation provisions of the Act.

Illustration – Speculation Loss

Suppose an assessee has a speculation loss of ₹5,00,000 and speculation profit of ₹2,00,000 during the relevant tax year.

Particulars Amount (₹)
Speculation Profit 2,00,000
Less: Speculation Loss (2,00,000)
Taxable Speculation Profit Nil
Original Speculation Loss 5,00,000
Less: Loss Set-off (2,00,000)
Speculation Loss carried forward 3,00,000

The balance ₹3,00,000 can be carried forward and set off only against future speculation profits, within the four-tax-year limit prescribed by Section 113.

Management Notes

Carry forward and Set off of Business Loss other than Speculation Loss [Sec. 112]

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Section 112 of the Income-tax Act, 2025 deals with the carry forward and set-off of business losses, other than losses from speculation business and other specially governed activities. Where a business loss cannot be fully adjusted in the tax year in which it arises, the unabsorbed portion may be carried forward to subsequent tax years, subject to prescribed conditions. Such brought-forward loss can generally be adjusted against profits and gains of eligible business or profession carried on by the assessee. The provision also prescribes the period of carry forward, continuity requirements and conditions for claiming the benefit of set-off.

1. Meaning of Business Loss

A business loss arises where the allowable business expenditure and deductions exceed the taxable receipts or profits from a business or profession during a tax year. For Section 112, the provision deals with ordinary business losses and excludes speculation losses and losses governed by separate special provisions. Before carrying forward the loss, the assessee must first apply the relevant current-year set-off provisions. If the entire business loss cannot be absorbed against eligible income during that year, the remaining amount becomes an unabsorbed business loss. Subject to statutory conditions, this balance may be carried forward and adjusted against eligible business or professional income in subsequent years.

2. Carry Forward of Business Loss

Where an eligible business loss cannot be wholly set off during the tax year in which it arises, the remaining amount may be carried forward under Section 112. The carried-forward loss retains its character as an ordinary business loss and may be considered for adjustment in subsequent tax years. Carry forward is subject to compliance with the conditions prescribed under the Act, including applicable requirements relating to determination and reporting of the loss. The benefit ensures that a genuine business loss is not permanently disregarded merely because sufficient taxable income is unavailable in the year of loss. The unabsorbed amount is therefore available for future set-off.

3. Set-off in Subsequent Tax Years

A business loss carried forward under Section 112 can generally be set off against profits and gains of business or profession assessable in a subsequent tax year, subject to the conditions prescribed by the Act. It cannot ordinarily be adjusted against income chargeable under heads such as salary, house property, capital gains or income from other sources once it has been carried forward. The business generating the loss need not necessarily continue in every situation if the statutory requirements otherwise permit the set-off. However, the assessee claiming the loss must satisfy the relevant conditions. The adjustment reduces taxable business income of subsequent tax years.

4. Period of Carry Forward

An eligible ordinary business loss may generally be carried forward for eight tax years immediately succeeding the tax year for which the loss was first computed. During this period, the loss may be adjusted against eligible business or professional income in accordance with Section 112. Where only part of the brought-forward loss can be absorbed in a particular year, the remaining amount may continue to be carried forward within the original prescribed period. The eight-year period is counted separately for each year’s loss. After expiry of the permitted period, any unabsorbed balance ordinarily lapses and cannot be carried forward for further set-off.

5. Filing of Return within Prescribed Time

For carrying forward an ordinary business loss, compliance with the return-of-income provisions is important. The loss should be determined in pursuance of a return furnished in accordance with the applicable statutory requirements and within the prescribed time, where timely filing is required for carry forward. Failure to comply may result in loss of the benefit of carrying forward the business loss, even though current-year set-off may be governed separately. Therefore, an assessee having a business loss should correctly disclose the loss and file the relevant return within the statutory period. Proper reporting enables the loss to be carried forward and claimed in subsequent years.

Illustration

Suppose Mr. A has a business loss of ₹6,00,000 in Tax Year 2026–27. After permissible current-year adjustment of ₹1,50,000, ₹4,50,000 remains unabsorbed.

Particulars Amount (₹)
Business Loss 6,00,000
Less: Current-year eligible set-off (1,50,000)
Business Loss carried forward 4,50,000

In the following year, Mr. A earns business profit of ₹3,00,000:

Particulars Amount (₹)
Business Profit 3,00,000
Less: Brought-forward Business Loss (3,00,000)
Taxable Business Income Nil
Balance Loss carried forward 1,50,000
Management Notes

Loss under the head ‘Income from House Property’ [Sec. 110]

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Section 110 of the Income-tax Act, 2025 deals with the carry forward and set-off of loss under the head “Income from House Property.” Where such loss cannot be wholly adjusted against income of the relevant tax year under the applicable set-off provisions, the unadjusted amount may be carried forward to subsequent tax years. The carried-forward loss can be set off only against income from house property, subject to the prescribed conditions and time limit. This provision ensures that eligible unabsorbed house-property losses receive tax adjustment in future years.

1. Meaning of House Property Loss

A loss from house property arises when the deductions allowable while computing income from a house property exceed its taxable annual value. An important reason for such loss may be the deduction available for interest on borrowed capital, subject to the applicable provisions and limits. Where an assessee owns more than one property, income and loss from different house properties are first considered according to the applicable intra-head set-off rules. If the final computation under the head results in a loss, it may be adjusted in the current year to the extent permitted. The remaining unabsorbed amount is governed by Section 110.

2. Carry Forward of Unabsorbed Loss

Where a loss computed under Income from House Property cannot be wholly set off during the relevant tax year, Section 110 permits the remaining loss to be carried forward to subsequent tax years. The provision ensures that an eligible house-property loss is not permanently lost merely because sufficient taxable house-property income is unavailable in the year in which the loss arises. The carried-forward amount retains its character as a house-property loss and is governed by the specific restrictions prescribed under the Act. It can subsequently be adjusted only in the manner authorised by Section 110, thereby reducing eligible future house-property income.

3. Set-off in Subsequent Years

A house-property loss carried forward under Section 110 can be set off in a subsequent tax year against income chargeable under the head “Income from House Property.” It cannot be adjusted against salary, business income, capital gains or income from other sources merely because those incomes are available in the later year. This restriction distinguishes the treatment of carried-forward loss from certain current-year set-off rules. The amount set off in each subsequent year is limited to the available taxable income from house property. Any balance remaining after such adjustment may continue to be carried forward, provided the prescribed carry-forward period has not expired.

4. Period of Carry Forward

Under Section 110, an eligible unabsorbed loss from house property may be carried forward for eight tax years immediately succeeding the tax year for which the loss was first computed. During this period, the loss may be adjusted against available income under the head Income from House Property. If only part of the loss is absorbed in a particular year, the remaining eligible amount may continue to be carried forward within the prescribed period. After the expiry of the permitted period, any unadjusted balance cannot ordinarily be carried forward further. Therefore, maintaining proper year-wise records of losses and set-off is important for tax computation.

illustration

Suppose an assessee has a house-property loss of ₹4,00,000. Assume ₹2,00,000 is eligible for adjustment during the current year and the balance remains unabsorbed.

Particulars Amount (₹)
Loss under Income from House Property 4,00,000
Less: Current-year eligible set-off (2,00,000)
Loss carried forward under Section 110 2,00,000

If the assessee earns ₹1,50,000 from house property in the next year:

Particulars Amount (₹)

Income from House Property

 1,50,000

Less: Brought-forward House Property Loss

 (1,50,000)

Taxable House Property Income

 Nil

Balance Loss carried forward

 50,000
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