Set-off and Carry Forward of Losses under the Income-tax Act, 2025: Rules, Continuity, and Practical Impact

Set-off and carry forward of losses is a core structural feature of the Indian income-tax system. The Income-tax Act, 2025 continues this framework with substantial continuity, while tightening compliance and reporting expectations.

Understanding these provisions correctly is essential not just for tax planning, but also for avoiding disallowances during assessment.

Let’s break it down.

Concept of Set-off and Carry Forward

Set-off allows losses incurred under one source or head of income to be adjusted against income from another source or head, subject to statutory conditions.

Carry forward permits unadjusted losses to be carried to future years for adjustment against eligible income.

The law follows a simple principle:
Loss relief is allowed, but only in a controlled and documented manner.

Intra-head and Inter-head Set-off

Under the Income-tax Act, 2025:

Loss from one source can generally be set off against income from another source under the same head (intra-head set-off).

Certain losses can be set off against income under other heads (inter-head set-off), except where specifically prohibited.

However:

Speculative losses

Capital losses

Losses from owning and maintaining race horses

continue to follow restricted set-off rules.

These structural restrictions remain unchanged.

Carry Forward of Losses: Core Rules

Losses that cannot be fully set off in the same year may be carried forward, subject to conditions such as:

Timely filing of return

Nature of loss

Maximum permissible carry-forward period

For example:

Business loss can be carried forward for eight assessment years

Unabsorbed depreciation can be carried forward without time limit

Capital losses can be set off only against capital gains

Failure to comply with procedural requirements can permanently extinguish the right to carry forward.

Impact of the New Tax Regime

The introduction and expansion of the new tax regime has not diluted the fundamental loss adjustment provisions.

However, certain deductions and incentives are unavailable under the new regime, which indirectly affects loss computation and absorption.

What this really means is:
Losses still exist, but their future usability depends on regime choice and compliance discipline.

Key Compliance Risks

Set-off and carry forward claims are frequently disallowed due to:

Belated filing of returns

Incorrect classification of losses

Mismatch between books and return disclosures

Absence of audit or supporting schedules

In scrutiny assessments, loss claims are one of the first areas examined.

Conclusion

The Income-tax Act, 2025 preserves the structural continuity of set-off and carry forward provisions while placing greater emphasis on accuracy, documentation, and timing.

Loss relief is a statutory right, but only for taxpayers who respect both substance and procedure.

Correct planning today prevents irreversible loss of benefits tomorrow.

Written by:
Abhishek Gupta
Chartered Accountant
Office No. 19, Sagar Building, 4th Floor, Plot-327,
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Mumbai – 400009
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