The Indian Income Tax Act, 1961, provides a robust mechanism for taxpayers to reduce their tax liability by setting off and carrying forward losses incurred during a financial year. These provisions are crucial for both individual taxpayers and business entities as they help in ensuring equity in taxation and supporting enterprises in overcoming temporary financial setbacks.

What is Set-Off and Carry Forward of Losses?
Under the Income Tax Act, 1961, taxpayers are allowed to adjust losses against income, either in the same financial year (set-off) or in subsequent years (carry forward). This provision ensures fair taxation by allowing businesses and individuals to offset difficult financial years with profitable ones.

Types of Losses Eligible for Set-Off and Carry Forward

House Property Loss [Section 71B]
✅ Can be set off against any income (including salary, capital gains, etc.)
🔁 Can be carried forward for 8 assessment years
💡 Maximum limit for set-off in a year: ₹2,00,000

Business Loss (Non-Speculative) [Section 72]
✅ Set-off allowed only against business income
🔁 Carry forward allowed for 8 assessment years
⚠️ Return must be filed within due date under Section 139(1)

Speculative Business Loss [Section 73]
✅ Set-off allowed only against speculative income
🔁 Carry forward allowed for 4 assessment years

Capital Loss [Section 74]
✅ Short-Term Capital Loss (STCL) – set-off against STCG or LTCG
✅ Long-Term Capital Loss (LTCL) – set-off only against LTCG
🔁 Carry forward for 8 assessment years

Loss from Owning and Maintaining Race Horses [Section 74A(3)]
✅ Set-off only against similar income
🔁 Carry forward for 4 assessment years

Unabsorbed Depreciation [Section 32(2)]
✅ Can be set off against any head of income (except salary)
🔁 Can be carried forward indefinitely

Return Filing Requirement for Carry Forward
To carry forward most types of losses:
You must file your Income Tax Return within the due date under Section 139(1).
Exception: Loss from house property – can be carried forward even if return is belated.

Priority Rules for Set-Off (as per law)

Intra-head set-off first (same head of income)
Then, inter-head set-off (different heads)
Carry forward comes only after both above steps fail
Order of set-off: Current year depreciation > Brought forward business loss > Unabsorbed depreciation