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Section 109 Income Tax Act 2025: Can Losses Be Set Off Against Other Income?

Section 109 governs inter-head set-off: the adjustment of an eligible loss under one head of income against taxable income under another head in the same tax year. It contains important restrictions for business losses, house property losses and capital losses.

Applicable law: Section 109, Chapter VII of the Income-tax Act, 2025, effective from 1 April 2026. The provision broadly corresponds to Section 71 of the Income-tax Act, 1961. Always apply the rules relevant to the tax year and the particular type of loss.

What does Section 109 provide?

Section 109(1) permits a loss computed under a head of income other than capital gains to be adjusted against income under another head, including capital gains, for the same tax year, subject to Chapter VII and two express conditions. A business or professional loss cannot be set off against salary income; and the inter-head set-off of a house property loss is restricted to Rs. 2,00,000.

Section 109(2) prohibits setting off a loss under the head "Capital gains" against income under any other head. Capital losses are dealt with under the separate intra-head and carry-forward provisions.

Important distinction: Section 108 concerns set-off within the same head of income; Section 109 concerns set-off between different heads. Other specific restrictions in Chapter VII and elsewhere in the Act continue to apply.

Relevant statutory concepts

Tax year: The period for which income and losses are computed under the 2025 Act. Inter-head set-off under Section 109 applies to income and eligible losses of the same tax year.
Head of income: A statutory category used to compute income, including salaries, income from house property, profits and gains of business or profession, capital gains and income from other sources.
Intra-head set-off: Adjustment of a loss from one source against income from another source under the same head, subject to Section 108 and other applicable provisions.
Inter-head set-off: Adjustment of an eligible net loss under one head against income under another head, subject to Section 109 and other restrictions.
Carry forward: Treatment of an eligible unadjusted loss in a later tax year, subject to the relevant statutory conditions and time limits. Section 109 does not itself confer an unrestricted carry-forward right.

What are the restrictions on inter-head set-off?

1. Business or professional loss cannot reduce salary income

Under Section 109(1)(a), a loss from profits and gains of business or profession cannot be adjusted against income assessable under the head salaries. Other restrictions may also apply to particular business losses.

2. House property loss is capped at Rs. 2 lakh

Section 109(1)(b) permits set-off of a house property loss against income under another head only up to Rs. 2,00,000 in a tax year. An eligible balance may be carried forward under Section 110, subject to its conditions.

3. Capital losses cannot be adjusted against other heads

Section 109(2) does not permit capital losses to reduce salary, house property, business or other-source income. The separate capital gains set-off and carry-forward rules must be considered under Sections 108 and 111.

4. Special restrictions still apply

The opening words "subject to the provisions of this Chapter" mean that losses subject to specific statutory limitations cannot be treated as freely adjustable merely because Section 109 generally permits inter-head set-off.

Practical illustrations

Example A: House property loss against salary

An assessee has salary income of Rs. 12,00,000 and an otherwise eligible house property loss of Rs. 2,80,000. The maximum inter-head adjustment under Section 109 is Rs. 2,00,000. The remaining Rs. 80,000 must be examined under Section 110 for possible carry forward; it cannot be set off against salary in that tax year.

Example B: Business loss and salary

An individual has salary income of Rs. 9,00,000 and a business loss of Rs. 1,50,000. Section 109(1)(a) prohibits using that business loss to reduce the salary income. Its treatment against other eligible income or carry forward depends on the applicable provisions.

Example C: Capital loss and interest income

An assessee has a capital loss of Rs. 75,000 and taxable interest income of Rs. 2,00,000. The capital loss cannot be adjusted against the interest income under Section 109(2). Its adjustment against eligible capital gains or carry forward is governed by separate rules.

Example D: Eligible non-salary inter-head adjustment

Suppose an assessee has an ordinary eligible business loss of Rs. 1,00,000 and taxable income from other sources of Rs. 1,40,000. Subject to all specific restrictions, the loss may be adjusted against that other-source income, leaving Rs. 40,000 before any other applicable computations.

How should losses be adjusted?

  1. Compute income or loss separately under each statutory head.
  2. Apply eligible intra-head adjustments under Section 108.
  3. Identify the remaining loss and check whether special restrictions apply.
  4. Apply inter-head set-off under Section 109, including the business-to-salary prohibition and Rs. 2 lakh house property cap.
  5. Examine any eligible balance under the relevant carry-forward provisions, including Sections 110, 111 and 112.
  6. Maintain computation statements and supporting records and comply with applicable return-filing conditions.

Comparison with the Income-tax Act, 1961

Section 109 of the 2025 Act corresponds broadly to Section 71 of the 1961 Act. The Income Tax Department's transition guidance confirms that the general inter-head set-off framework, Rs. 2 lakh house property cap and capital loss restriction continue under the 2025 Act. For earlier years, consider the applicable saving and transition provisions, including Section 536.

Frequently asked questions

Can a business loss be set off against salary income?

No. Section 109(1)(a) expressly prohibits this adjustment.

Can a house property loss exceeding Rs. 2 lakh be adjusted against salary?

No. Only up to Rs. 2 lakh of an otherwise eligible house property loss may be adjusted against income under another head in the same tax year. The balance may qualify for carry forward under Section 110.

Can a short-term capital loss be set off against business income?

No. Section 109(2) prohibits inter-head set-off of capital losses. Section 108 governs eligible adjustments within capital gains.

Does Section 109 permit every kind of loss to be adjusted against other income?

No. The general rule is subject to the restrictions of Chapter VII and other applicable provisions.

Official law and useful resources

Official Income-tax Act 2025 (PDF)Official transition FAQsIncome Tax e-Filing Portal

Last reviewed: 10 November 2026. This article provides general statutory information and does not replace advice based on the facts of an individual case.