Chapter VII - Set Off, or Carry Forward and Set Off of Losses
Section 108
Section 108: set off of losses under same head of income
Section 108 opens the Act's chapter on set-off and carry-forward of losses. It lays down the basic rule that a loss from one source can be set off against income from another source under the same head of income in the same tax year, and then adds a specific restriction for capital gains: short-term capital losses can only be set off against other capital asset gains, while long-term capital losses can only be set off against other long-term capital asset gains.
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Need advice on Section 108?
This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) Unless provided otherwise in this Act, for any tax year, if net result of computation from any source under any head of income (other than “Capital gains”) is a loss, then assessee shall be entitled to set off such loss against his income from any other source under the same head for that tax year.
(2) Where the net result of computation of income made for any tax year under sections 72 to 90 in respect of— (a) any short-term capital asset is a loss, such loss shall be set off against the income, computed in respect of any other capital asset for that year; (b) any long-term capital asset is a loss, such loss shall be set off against the income computed in respect of any other long-term capital asset for that year.
Introduction
Section 108 deals with current-year loss adjustment within the same income head. Capital gains receive a separate short-term versus long-term rule: short-term loss may offset gain on any capital asset, whereas long-term loss offsets only long-term capital gain.
Key takeaways
Within-head set-off
A loss from one source can generally be set off against another source under the same income head in that tax year, subject to other statutory restrictions.
Capital-gain separation
A short-term capital loss can offset gains from another capital asset; a long-term capital loss can offset only long-term capital gains.
The general same-head set-off rule
Unless the Act provides otherwise, if the net result of computation from any source under any head of income (other than 'Capital gains') is a loss for a tax year, the assessee can set off that loss against income from any other source under the same head for that tax year.
Special rule for capital gains
Where the net result of computing income for a tax year under Sections 72 to 90 (the capital gains computation provisions) shows a loss on any short-term capital asset, that loss can be set off against income computed on any other capital asset for that year.
Where the net result shows a loss on any long-term capital asset, that loss can only be set off against income computed on any other long-term capital asset for that year - it cannot be set off against short-term capital gains.
Order of calculation
Compute each source within a head first, then use the same-head set-off permitted by this section before considering the other-head and carry-forward rules in later provisions.
Step-by-step flow for applying Section 108
- 1
Compute income source by source within each head
Section 108 works on the net result of computation from each source under a head.
- 2
Is the loss under a head other than "Capital gains"?
- Yes: Under Section 108(1), set it off against income from any other source under the same head for that tax year, unless the Act provides otherwise. Take any balance still unabsorbed to the last step (Section 109 and the carry-forward provisions).
- No - it is a capital loss: Go to the next step.
- 3
Is the capital loss on a short-term or long-term capital asset?
- Short-term: Set off against income computed on any other capital asset (short-term or long-term) for that year - Section 108(2)(a).
- Long-term: Set off only against income computed on any other long-term capital asset for that year - Section 108(2)(b).
- 4
Is any loss still unabsorbed?
Move to Section 109 (set-off against other heads, where allowed) and then the carry-forward provisions such as Sections 110 to 112.
Practical checklist
Do
- Classify each loss by income head and tax year before offsetting it.
- Track short-term and long-term capital losses separately against the gains permitted by subsection (2).
Avoid
- Do not use long-term capital loss against short-term capital gain.
- Do not apply the general same-head rule if another provision of the Act disallows the set-off.
Illustrative example
Worked example: same-head set-off for business and capital gains
Hypothetical facts (illustration only, not a real taxpayer): In one tax year, Mr. Shah has: Business A loss ₹2,00,000; Business B profit ₹5,00,000; short-term capital loss on asset P ₹1,00,000; long-term capital loss on asset Q ₹50,000; long-term capital gain on asset R ₹2,00,000; short-term capital gain on asset S ₹40,000.
Business head
Business A loss ₹2,00,000 is set off against Business B profit ₹5,00,000 under Section 108(1): net business income ₹3,00,000.
Long-term capital loss
The ₹50,000 loss on Q can be set off only against the long-term gain on R: ₹2,00,000 - ₹50,000 = ₹1,50,000.
Short-term capital loss
The ₹1,00,000 loss on P can be set off against any other capital asset. Using it first against the ₹40,000 short-term gain on S leaves ₹60,000, which is set off against the remaining long-term gain: ₹1,50,000 - ₹60,000 = ₹90,000.
Check
Total gains ₹2,40,000 less total capital losses ₹1,50,000 = ₹90,000.
Outcome
- Business income after same-head set-off: ₹3,00,000.
- Capital gains after set-off: ₹90,000 (all long-term in the order used here).
- Section 108(2) does not itself fix the order in which a short-term loss is applied between short-term and long-term gains; the order chosen changes which kind of gain remains.
Glossary
- Same-head set-off
- Adjustment of a loss from one source against income from another source under the same income head.
- Long-term capital loss
- A loss on a long-term capital asset, restricted here to long-term capital gains.
Frequently asked questions
Can a business loss be set off against rental income in the same year?
Section 108 allows a loss from one source to be set off against income from another source under the same head of income - so a loss from one business can be set off against profit from another business, for example, but this section does not cover cross-head set-off (that is dealt with separately).
Can a long-term capital loss be set off against a short-term capital gain?
No - Section 108(2) restricts a long-term capital asset loss to being set off only against income from another long-term capital asset in the same year.
Can a short-term capital loss be set off against a long-term capital gain?
Yes - Section 108(2)(a) allows a short-term capital asset loss to be set off against income computed in respect of any other capital asset (short-term or long-term) for that year.
Need help applying this provision to your situation?
Get help planning your loss set-off strategyLast updated 9 October 2026