Section 71 and 71A of the Income Tax Act: Set Off of Loss from One Head Against Another

Section 71 of the Income-tax Act, 1961 governed inter-head adjustment of losses, while Section 71A contained a limited transitional rule for old house-property losses. From 1 April 2026, the corresponding current rule is principally contained in Section 109 of the Income-tax Act, 2025.

What does set off of loss from one head against another mean?

Income tax law computes income separately under statutory heads such as salaries, income from house property, profits and gains of business or profession, capital gains, and income from other sources. When computation under one head produces a loss while another head produces positive income, the law may permit the loss to be adjusted against that income. This adjustment is commonly called inter-head set off.

The right to set off is not unlimited. It operates subject to the conditions and restrictions contained in the applicable Chapter dealing with aggregation of income and losses.

Section 71 of the Income-tax Act, 1961

Section 71 was titled "Set off of loss from one head against income from another". Its practical effect can be understood through the following rules.

1. General inter-head set off

Where the computation under a head other than capital gains resulted in a loss, Section 71 permitted that loss, subject to the other provisions of the Chapter, to be adjusted against income assessable under another head. The section separately addressed cases where the assessee did or did not have capital-gains income.

2. Business loss cannot be set off against salary

Section 71(2A) specifically prohibited set off of a loss under the head "Profits and gains of business or profession" against income chargeable under the head "Salaries". This restriction is also reflected in the current Section 109 of the Income-tax Act, 2025.

3. Capital loss cannot be adjusted against another head

Under Section 71(3), a loss computed under the head "Capital gains" could not be set off against income under another head. Capital-loss adjustment is therefore governed by the special rules applicable to capital gains rather than the general inter-head rule.

4. House-property loss: Rs. 2,00,000 inter-head limit

Section 71(3A) restricted the amount of loss under the head "Income from house property" that could be adjusted against income under another head. To the extent the house-property loss exceeded Rs. 2,00,000, the excess could not be set off against another head for that assessment year.

The current Section 109(1)(b) of the Income-tax Act, 2025 continues the Rs. 2,00,000 limit for set off of house-property loss against income under another head for a tax year.

Section 71A: transitional provision for house-property loss

Section 71A dealt with a house-property loss for the assessment year beginning on 1 April 1993 or 1 April 1994, insofar as the loss related to interest on borrowed capital referred to in the then applicable Section 24(1)(vi) and had not already been set off.

The provision allowed the qualifying unabsorbed loss to be carried forward and set off in the assessment year beginning on 1 April 1995 and, if a balance remained, in the assessment year beginning on 1 April 1996 against income under any head. Its purpose was therefore transitional and tied to those specified assessment years.

Historical Section 71(4)

Section 71(4) coordinated the operation of Section 71 with Section 71A for house-property losses in the assessment years beginning on 1 April 1995 and 1 April 1996. The current relevance of this sub-section is mainly historical, because it addressed the sequencing of set off for the transitional losses covered by Section 71A.

Current position from 1 April 2026: Section 109 of the Income-tax Act, 2025

For tax years beginning on or after 1 April 2026, Section 109 of the Income-tax Act, 2025 is the principal corresponding provision for set off of losses under one head against income under another head. In substance, it provides that a loss under a head other than capital gains may be set off against income under another head, including capital gains, subject to two express conditions: business or professional loss cannot be set off against salary, and house-property loss can be set off against another head only up to Rs. 2,00,000.

Section 109(2) separately provides that a capital loss cannot be set off against income under another head.

Carry forward of house-property loss under the current law

Section 110 of the Income-tax Act, 2025 applies where a house-property loss cannot be wholly set off under Section 109. The unadjusted amount is carried forward and may be set off only against income from house property in a later tax year. The carry-forward period is limited to eight tax years immediately succeeding the tax year for which the loss was first computed.

What happens to losses and proceedings from the 1961 Act period?

The repeal of the Income-tax Act, 1961 does not simply erase earlier losses or pending matters. Section 536 of the Income-tax Act, 2025 contains repeal and saving provisions. The Income Tax Department has clarified that eligible losses arising for periods before 1 April 2026 can continue to be carried forward and set off under the new framework subject to the applicable saving provisions and the original conditions governing those losses.

Accordingly, the relevant tax year is important. A dispute, assessment, appeal or loss originating under the 1961 Act may still require examination of Sections 71, 71A, 71B and other provisions of that Act even though the 2025 Act is now in force.

Official references

For the current statutory position and transition guidance, refer to the official Income Tax Department resources:

• Income-tax Act, 2025 - official Income Tax Department portal
• Set off and carry forward of losses - official FAQs
• Section 71 of the Income-tax Act, 1961 - official text

The statutory text and applicable amendments prevail over explanatory material. Tax treatment can depend on the relevant year, nature of loss and other provisions of the Act.

Updated: 28 September 2026