The Indian Income-tax Act, 1961, not only levies tax on income but also provides relief to taxpayers by allowing the set-off and carry forward of losses. These provisions ensure that taxpayers are taxed only on their net income after adjusting eligible losses. The rules governing set-off and carry forward of losses are essential for effective tax planning, as they determine:

• Whether a loss can be adjusted against income in the same year.
• Whether it can be adjusted against other heads of income (inter-head).
• How long such losses can be carried forward for adjustment in future years.

 Here is a structured breakdown of these rules as per the Income-tax Act, 1961.

🔹 1. Types of Set-off

1. Intra-head set-off (Section 70)
   • Loss from one source can be set off against income from another source under the same head.
   • Example: Loss from one business can be set off against profit from another business.
2. Inter-head set-off (Section 71)
   • If after intra-head adjustment, loss still remains, it can be set off against income from other heads (except certain restrictions).
   • Example: Loss from house property can be set off against salary income (up to ₹2 lakh in a year).
3. Carry-forward and set-off
   • If loss cannot be adjusted in the same year, it may be carried forward to future years, subject to conditions.

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🔹 2. Rules by Head of Income

(A) Salary Income

• Loss under salary is not possible, so no set-off.

(B) House Property Loss

• Can be set off against any other head in the same year (subject to max ₹2 lakh per year).
• Balance can be carried forward for 8 years and set off only against house property income.

(C) Business/Profession Loss

• Can be set off against any income except salary in the same year.
• If unabsorbed, can be carried forward for 8 years, but only against business income.
• Speculative business loss: Can be set off only against speculative gains (carry forward up to 4 years).
• Specified business u/s 35AD loss: Can be set off only against income from specified business.

(D) Capital Gains

• Short-Term Capital Loss (STCL): Can be set off against both STCG & LTCG. Carry forward for 8 years.
• Long-Term Capital Loss (LTCL): Can be set off only against LTCG. Carry forward for 8 years.

(E) Other Sources

• Loss from owning & maintaining racehorses can be set off only against income from the same. Carry forward up to 4 years.
• Other losses (like interest, dividend, casual income) usually can be adjusted except against lottery, betting, gambling income (which has no set-off).

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🔹 3. Restrictions

• Losses from speculative business → only against speculative gains.
• Losses from lotteries, crossword puzzles, gambling, betting → no set-off, no carry forward.
• Depreciation (unabsorbed) → can be carried forward indefinitely, but set off only against business income.
• To carry forward most losses, return must be filed within due date (Section 139(1)).

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✅ In short:

• First adjust within the same head → then try against other heads → if not possible, carry forward as per rules.

Here’s a summary table of Income Tax Set-off & Carry Forward Rules (India) for quick reference:

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📊 Income Tax Loss Set-off & Carry Forward Rules

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✅ Golden Rule:

1. Same year: Intra-head → Inter-head (if allowed).
2. Next years: Follow carry-forward rules (with restrictions).

3. File return on time (u/s 139(1)) to claim carry forward (except unabsorbed depreciation & house property loss – these are allowed even if return is late).