Set off of losses within a head and between heads

Meaning of set off

Total income is computed head by head (salaries, income from house property, profits and gains of business or profession, capital gains, income from other sources). If the result for a source or a head is a loss, the Act lets the assessee reduce his other income of the same year by that loss. This is set off. It is done in two stages: first within the same head (intra-head), then against other heads (inter-head). The question names section 71 of the 1961 Act (inter-head set off) and its companion section 70 (intra-head set off); in the Income-tax Act, 2025 they are sections 108 and 109.

Intra-head set off (section 108, formerly section 70)

1. A loss from one source under a head is set off against income from another source under the same head in the same tax year: for example, a loss from one business against the profit of another business, or a loss from one house property against income from another (section 108(1)).
2. Capital gains: a short-term capital loss may be set off against any capital gain, short-term or long-term; a long-term capital loss only against long-term capital gains (section 108(2)).

Inter-head set off (section 109, formerly section 71)

A loss under any head other than capital gains that remains after intra-head set off is set off against income under any other head, including capital gains, in the same tax year (section 109(1)), subject to these limits:

1. A loss under Profits and gains of business or profession cannot be set off against income under Salaries (section 109(1)(a)).
2. A loss under Income from house property can be set off against income under other heads only up to ₹2,00,000 in a year (section 109(1)(b)); the rest is carried forward against house property income only, for at most the eight tax years that follow the tax year in which the loss was first computed (section 110(1)-(2)).
3. A loss under Capital gains cannot be set off against income under any other head (section 109(2)); it is carried forward under section 111.

Losses that cannot be set off against other income

• A loss from a speculation business is set off only against speculation profits (section 113, formerly section 73).
• A loss from owning and maintaining race horses is set off only against income from that activity.
• No loss is set off against winnings from lotteries, crossword puzzles, races, card games, gambling or betting, and no expenditure or allowance is deducted from them (section 94(4), formerly section 58(4)).
• A loss from a source whose income is exempt cannot be set off against taxable income.
• Under the default (new) tax regime, a loss from house property cannot be set off against income under any other head.

Illustration (our own)

Ms. Iyer has a salary of ₹9,00,000, a loss of ₹2,80,000 from a let-out house (interest on the loan exceeding the rent), profit of ₹1,00,000 from business A and a loss of ₹60,000 from business B, and a long-term capital loss of ₹40,000. Under the optional (old) regime:

• Intra-head: business B's loss of ₹60,000 is set off against business A's profit, leaving ₹40,000.
• Inter-head: the house property loss is set off against salary only up to ₹2,00,000; ₹80,000 is carried forward.
• The long-term capital loss cannot be set off against any other head; it is carried forward. Gross total income: ₹9,00,000 − ₹2,00,000 + ₹40,000 = ₹7,40,000.

Conclusion

Losses are first absorbed within their own head and then, with stated exceptions, against other heads of the same year. The limits (business loss not against salary, house property loss capped at ₹2,00,000, capital loss and speculation loss kept within their own class) stop losses of one kind from wiping out income of a different kind.