Question 5 (b)

Set off and carry forward of house property and capital losses

6 marks

Time to write: About 12 minutes
Topic: Set-off and carry forward of losses
Notes: Crux notes

Question

Question 5 (b) · 6 marks

Explain the provisions of the Income Tax Act 1961 on set off and carry forward of house property, of short-term capital loss, and of long-term capital losses. (6)

Paper note: Set under the Income-tax Act, 1961 for assessment year 2024-25 (previous year 2023-24); answered under the Income-tax Act, 2025 for tax year 2026-27, so the year term moves forward by 3 years and every date in the question moves forward by the same 3 years, so that intervals, holding periods and ages are as printed. Every figure and name is as printed. The question names the Income-tax Act, 1961; the answer gives the corresponding provisions of the Income-tax Act, 2025 and says so.

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

12 minfor 6 marks

Read from the question

ExplainEach point stated, then explained in a line or two.

Write it in this order

Read; underline the asks; jot your points 1 min
1 House property loss: set off, limit, carry forward 2 marks 3 min
2 Short-term capital loss 1½ marks 3 min
3 Long-term capital loss and the return condition 1½ marks 2 min
4 Illustration 1 mark 2 min
Check: every ask answered, key terms underlined 1 min

1234

Short on time? Trim steps 1–3 evenly rather than skip one: each is capped at its own marks. End with step 4 in a line or two.

Try it first. About 12 minutes for 6 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

Introduction

A loss under one source or head can be set off against income in the same year (set off); what cannot be set off may, in some cases, be taken to later years (carry forward). The provisions the question names in the Income-tax Act, 1961 (sections 70, 71, 71B and 74) are sections 108 to 111 of the Income-tax Act, 2025.

Picture itSet off and carry forward of house property and capital losses

1The toy shop's loss sinks quietly into the sweet shop's profit—business against business first.

Intra-head set offA loss from one business against the profit of another business

2What remains crosses over: the house file absorbs the business loss.

Inter-head set offA loss under any head other than capital gains that remains after intra-head set off is set off against income under any other head

3Only the locked tray stands apart—a capital loss leaves every other tray alone.

Capital gainsA loss under Capital gains cannot be set off against income under any other head

Loss from house property

Same head, same year (section 108(1)): a loss from one house property is set off against income from another house property.
Other heads, same year (section 109(1)(b)): the balance may be set off against income under any other head (salary, business, capital gains, other sources), but only up to ₹2,00,000 in a year.
Carry forward (section 110): the loss not set off is carried forward to the following tax years and set off only against income from house property, for at most the eight tax years that follow the tax year in which the loss was first computed (section 110(2)). It can be carried forward even if the return for the loss year was filed late (section 121 does not cover it).
Default regime: a house property loss cannot be set off against any other head (section 202(2)(b)(ii)), and the current interest of section 22(1)(b) on a self-occupied house is not deductible (section 202(2)(a)(v)). The loss that cannot be set off is treated as already given full effect, so it is not carried forward either (section 202(3)).

Short-term capital loss

Same year (section 108(2)(a)): set off against any capital gain, short-term or long-term.
Not against other heads (section 109(2)): a capital loss cannot be set off against salary, business or any other head.
Carry forward (section 111(1)(a)(i)): against any capital gain, short-term or long-term, for at most the eight tax years that follow the tax year in which the loss was first computed (section 111(2)).

Long-term capital loss

Same year (section 108(2)(b)): set off only against long-term capital gains.
Not against other heads (section 109(2)).
Carry forward (section 111(1)(a)(ii)): only against long-term capital gains, for at most the eight tax years that follow the tax year in which the loss was first computed (section 111(2)).

A capital loss is carried forward only if it was determined in a return filed by the due date of section 263(1) (section 121).

Illustration (our own)

Mr. Bose has a salary of ₹9,00,000, a loss of ₹2,60,000 from a let-out house, a short-term capital loss of ₹50,000 on shares, a long-term capital gain of ₹80,000 on gold and a long-term capital loss of ₹1,20,000 on land, and has opted for the old regime.

House property: ₹2,00,000 is set off against salary; ₹60,000 is carried forward against future house property income.
Capital gains: the long-term loss of ₹1,20,000 is first set off against the long-term gain of ₹80,000; the balance of ₹40,000 is carried forward. The short-term loss of ₹50,000 cannot be set off this year (no gain left), so it too is carried forward.

Where the 6 marks sit

#	Component	Marks
1	House property loss: set off, ₹2,00,000 limit, carry forward	2
2	Short-term capital loss	1.5
3	Long-term capital loss and the return condition	1.5
4	Illustration	1
	Total	6

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