Under the Income Tax Act, the income earned by the taxpayers is categorised under five major heads of salary, house property, capital gains, business or profession and any other source.

 There are two mechanisms of loss adjustment: Intra-head and inter-head. The former allows taxpayers to offset losses from one source of income in a particular head against income from another source falling under the same head. Example, adjustment of loss from business X against profit from business Y.

Inter-head adjustment, on the other hand, allows the taxpayer to set off losses incurred under one head of income against the income under another head. E.g., Loss under the house property head can be adjusted against salary income.  The taxpayer should first make an intra-head adjustment before considering an inter-head adjustment.

 Capital loss

Loss arising from capital assets under the head capital gains is termed capital loss. Capital loss cannot be set off against income under other heads, i.e. to say capital losses can only be set off with capital gains (except house property with conditions applied).

Also, the long-term capital losses can only be set off against long-term capital gains, whereas the short-term capital losses can be adjusted against both long-term and short-term capital gains. This rule does not prevent losses of other heads from being set off against income under the capital gains head.  Unadjusted capital loss of a year can be carried forward to the next eight years and the set-off shall apply even in the ensuing years. However, the taxpayers can carry forward the capital loss only if they file their ITR on time.

Setting-off rules from loss from house property are relatively generous. It can be adjusted against income from any other head, but only to the extent of ₹2 lakh in a particular year. The taxpayers can carry forward the unadjusted losses to the next eight years even if the income tax return is not filed by the deadline. However, in the subsequent years, it can only be set off against income from house property. These rules shall also apply to commercial properties.

Business loss

Loss from speculative businesses can only be set off against income from speculative businesses. However, losses from non-speculative businesses can be set off against any business income and also against other heads of income, except salary. 

The rules to carry forward the loss also depends on the nature of the business. The unadjusted losses from speculative business can be carried forward to four successive years, while those from the non-speculative business can be carried forward to the next eight years. Taxpayers are allowed to claim a deduction of depreciation and certain other specified items. If the income falls short of these expenses, the balance of unabsorbed expenses can be carried forward to the subsequent years. Unabsorbed depreciation and loss from specified business under section 35AD can be carried forward to any number of years.

 Other sources

Loss from lotteries, crossword puzzles, races, card games, any other game or betting or gambling of any form cannot be set off or carried forward. The only exception is loss from the business of owning and maintaining race horses which can only be set off against income from such business. Similarly, loss from the transfer of a virtual digital asset (VDA), (cryptocurrency and related assets) shall not be allowed to be set off against income from another VDA or to be carried forward to subsequent years.