Income Tax Law • Set-Off and Carry Forward of Losses
Section 71 of the Income-tax Act, 1961: Set-Off of Loss from One Head Against Another
Understand inter-head adjustment of losses, the restrictions on business and capital losses, the house-property loss limit and the corresponding law under the Income-tax Act, 2025.
What is inter-head set-off under Section 71?
Inter-head set-off means adjusting an eligible loss computed under one head of income against taxable income under another head in the same assessment year. For example, an eligible loss from house property may be adjusted against salary income, subject to the statutory limit. It is different from intra-head set-off, which adjusts a loss from one source against income from another source under the same head under Section 70.
The five principal heads of income are salaries, income from house property, profits and gains of business or profession, capital gains, and income from other sources. The right to set off losses is subject to special provisions applicable to the nature of the loss and the income.
Section 71: Explanation of each subsection
Section 71(1): Loss where there is no capital-gains income
Subject to the provisions of the Chapter, where the computation under a head other than capital gains produces a loss and there is no capital-gains income, the eligible loss may be set off against taxable income under another head in the same assessment year. The specific exclusions described below continue to apply.
Section 71(2): Loss where capital-gains income exists
If the taxpayer has capital-gains income, an otherwise eligible loss under a head other than capital gains may, subject to statutory restrictions, be adjusted against income under another head, including short-term or long-term capital gains. This does not override the prohibition on adjusting business losses against salary or the house-property loss ceiling.
Section 71(2A): Business loss cannot be set off against salary
A loss computed under profits and gains of business or profession cannot be adjusted against income taxable under salaries. For example, a business loss of Rs 1,50,000 cannot reduce salary income merely by invoking Section 71. Other restrictions, including those applicable to speculative or specified-business losses, must also be checked.
Section 71(3): Capital loss cannot be adjusted against other heads
A loss under capital gains cannot be set off against salary, house-property, business or other-sources income. Eligible capital losses are dealt with under the capital-gains set-off and carry-forward provisions, including Section 74.
Section 71(3A): Rs 2 lakh limit for house-property loss
Inter-head adjustment of a loss under income from house property is restricted to Rs 2,00,000 in an assessment year. Any remaining eligible house-property loss is subject to the carry-forward rules under Section 71B, generally for up to eight assessment years and only against income from house property.
Section 71(4): Historical transitional rule
Subsection (4) concerns the order of set-off for house-property losses relating to assessment years commencing on 1 April 1995 and 1 April 1996, including the transitional provision in Section 71A. It is historical in character and does not create a separate general set-off entitlement for current years.
Practical examples of inter-head set-off
| Situation | Result under Section 71 |
|---|---|
| Salary income Rs 9,00,000; eligible house-property loss Rs 2,80,000 | At most Rs 2,00,000 can be set off against salary, subject to applicable regime and other provisions. Balance Rs 80,000 may be carried forward if eligible. |
| Salary Rs 8,00,000; ordinary business loss Rs 1,50,000 | Business loss cannot be set off against salary under Section 71(2A). |
| Salary Rs 8,00,000; capital loss Rs 90,000 | Capital loss cannot be adjusted against salary under Section 71(3). |
| Eligible ordinary business loss Rs 1,00,000; taxable income from other sources Rs 1,30,000 | Inter-head set-off may be available, subject to the character of the income and other statutory restrictions. |
Examples are illustrative and do not account for all exclusions, special rates, the chosen tax regime or case-specific facts.
Income-tax Act, 2025: Corresponding Section 109
The Income-tax Act, 2025 applies from 1 April 2026. Its Section 109, titled Set off of losses under any other head of income, corresponds to Section 71 of the 1961 Act. It retains the central restrictions: business or professional losses cannot be adjusted against salary, house-property loss set-off against other heads is limited to Rs 2,00,000, and capital losses cannot be adjusted against income under another head.
For tax years governed by the 2025 Act, refer to Section 109 and the other applicable provisions of that Act. For earlier assessment years and saved proceedings, consult the relevant provisions of the 1961 Act and the transition rules. The Income Tax Department's official transition FAQs confirm that the fundamental loss set-off structure remains unchanged and explain treatment of eligible brought-forward losses.
Documents and compliance considerations
- Compute each source of income and loss correctly before applying intra-head and inter-head set-off.
- Keep supporting records, including business accounts, interest certificates, rental income and property documents, as relevant.
- Apply special restrictions and verify whether the selected tax regime changes the treatment of a claimed loss.
- Check return-filing conditions for carrying forward particular categories of losses.
- Maintain a year-wise schedule of losses already set off and balances carried forward.
Official legal references
Legislative history retained from the original page
Section 71 was substituted by Act 49 of 1991, section 23, with effect from 1 April 1992. Subsection (2A) was inserted by Act 23 of 2004, section 14, with effect from 1 April 2005. Subsection (3A) was inserted by Act 7 of 2017, section 31, with effect from 1 April 2018. Subsection (4) was substituted by Act 32 of 1994, section 21, with effect from 1 April 1995.
This article is for general legal information. Applicable provisions depend on the relevant tax year, tax regime and individual circumstances.