Specified Business and Capital Loss Set Off: Sections 114 and 111

The rules formerly contained in Sections 73A and 74 of the Income-tax Act, 1961 now correspond, respectively, to Sections 114 and 111 of the Income-tax Act, 2025. The Income-tax Act, 2025 came into force on 1 April 2026. This article explains the current rules and the transition for losses arising under the repealed 1961 Act.

What does set off and carry forward of loss mean?

Set off means adjusting an eligible loss against income or profits permitted by the tax law. Carry forward means taking an eligible unabsorbed loss to a later tax year for adjustment in accordance with the applicable statutory conditions.

Section 114: Loss from specified business

Section 114 of the Income-tax Act, 2025 deals with a loss computed from a specified business referred to in Section 46. It is the current corresponding provision for Section 73A of the Income-tax Act, 1961.

How can a specified business loss be set off?

A loss computed in respect of a specified business can be set off only against profits and gains of another specified business. It cannot be freely adjusted against ordinary business income or income under another head merely because the assessee has taxable income from those sources.

What happens if the loss is not fully absorbed?

If the specified business loss cannot be wholly set off in the tax year, the unabsorbed amount is carried forward to the following tax year. It may then be set off against profits and gains of any specified business carried on by the assessee for that tax year. Any balance that still remains unabsorbed continues to be carried forward, subject to the other provisions of the Act.

Section 111: Loss under the head Capital gains

Section 111 of the Income-tax Act, 2025 is the current corresponding provision for Section 74 of the Income-tax Act, 1961. It governs the carry forward and set off of losses computed under the head "Capital gains".

Short-term capital loss

A carried-forward short-term capital loss may be set off against eligible capital gains from a short-term capital asset or a long-term capital asset, subject to the provisions of the Act.

Long-term capital loss

A carried-forward long-term capital loss is restricted to set off against eligible long-term capital gains. It cannot be set off against short-term capital gains.

Carry-forward period

An eligible capital loss can be carried forward for up to eight tax years immediately succeeding the tax year in which the loss was first computed, subject to the statutory conditions for carry forward.

Return filing condition for carrying forward losses

The Income-tax Act, 2025 requires a person who has sustained a loss under the head "Profits and gains of business or profession" or "Capital gains" and intends to carry it forward to furnish the return in accordance with the applicable return provisions. Section 263 deals with the return of income, while Section 121 contains the corresponding rule concerning submission of returns for specified losses. Taxpayers should therefore ensure that the loss return is filed within the applicable statutory time where timely filing is required for carry-forward eligibility.

Transition from Sections 73A and 74 of the Income-tax Act, 1961

The Income-tax Act, 1961 was repealed when the Income-tax Act, 2025 came into force from 1 April 2026, subject to the savings and transition provisions. The official provision-mapping utility identifies old Section 73A with new Section 114 and old Section 74 with new Section 111.

For capital losses arising before 1 April 2026, the transition provisions preserve eligible amounts that would have been carried forward under old Section 74. Such loss may be carried forward and set off against capital gains under the new Act for the remaining permitted period, up to eight financial years immediately succeeding the financial year in which the loss was first computed under the repealed Act.

Old Section 73A: Position under the Income-tax Act, 1961

Under Section 73A, a loss computed in respect of a specified business referred to in old Section 35AD could be set off only against profits and gains of another specified business. Any unabsorbed amount was carried forward and could be adjusted against profits of a specified business in later assessment years, subject to the other provisions of Chapter VI.

Old Section 74: Position under the Income-tax Act, 1961

Under Section 74, a short-term capital loss could be carried forward and set off against capital gains from a short-term or long-term capital asset. A long-term capital loss could be set off only against long-term capital gains. The maximum carry-forward period was eight assessment years immediately succeeding the assessment year for which the loss was first computed.

Practical points

• Identify whether the loss arose before or on/after 1 April 2026 because the transition provisions may be relevant.
• Keep specified business losses separate from ordinary business losses because their set-off rule is restrictive.
• Keep short-term and long-term capital losses separately identifiable because their permitted set off differs.
• Check the original year in which a capital loss was computed so that the eight-year limit is correctly tracked.
• File the applicable return within the statutory time when timely filing is a condition for carrying the loss forward.

Official references

For the current text and transition provisions, refer to the official Income Tax Department resources for the Income-tax Act, 2025, the Income-tax Act, 2025 PDF, and the Department's provision comparison and transition guidance. For historical application, consult the official text of old Sections 73A and 74.

Note: This page is a general legal and tax information resource. Application of loss set-off provisions can depend on the tax year, nature of income, return filing, transition rules and other provisions of the Income-tax Act.