Chapter VII - Set Off, or Carry Forward and Set Off of Losses
Section 114
Section 114: set off and carry forward of specified-business losses
Section 114 deals with losses from a "specified business" - the category of business referred to in Section 46 (which typically covers businesses eligible for investment-linked deductions, such as certain infrastructure or cold-chain type businesses). A loss from such a business can only be set off against profits from another specified business.
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Need advice on Section 114?
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) Any loss, computed in respect of a specified business, referred to in section 46, shall be set off only against profits and gains of another specified business.
(2) Where for any tax year, loss computed in respect of a specified business cannot be wholly set off under sub-section (1), so much of the loss not so set off or the whole loss, as the case may be, shall be carried forward to the following tax year and— (i) be set off against the profits and gains, if any, of any specified business carried on by him for such tax year; and (ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following tax year and so on.
Introduction
A loss from a Section 46 specified business stays in the specified-business category. It can offset profit of another qualifying specified business in the same or a later tax year, with any unused balance carried onward under this section.
Key takeaways
Specified-business ring fence
A loss from a specified business under Section 46 can offset only profits of another specified business.
Carry-forward
Any remaining specified-business loss can be carried forward and applied to later qualifying specified-business profits under this section.
Set off only against specified-business profits
Any loss computed in respect of a specified business referred to in Section 46 can be set off only against profits and gains of another specified business.
Carry forward of unabsorbed loss
Where the loss cannot be wholly set off in the same tax year, the balance not so set off is carried forward to the following tax year and set off against profits and gains of any specified business carried on by the assessee in that year.
If the loss still cannot be wholly set off, the remaining amount is carried forward to the following tax year, and so on.
Verify the business category
Section 114 depends on whether the underlying activity is a specified business referred to in Section 46. Document that classification before applying the ring-fenced set-off.
Step-by-step flow for applying Section 114
- 1
Is the loss from a specified business referred to in Section 46?
- No: Section 114 does not apply; use the general business-loss rules.
- Yes: Go to the next step.
- 2
Same-year set-off
Set off only against profits and gains of another specified business (Section 114(1)) - not against an ordinary business or other heads.
- 3
Is any loss still unabsorbed?
- No: Nothing to carry forward.
- Yes: Carry forward to the following tax year (Section 114(2)).
- 4
Set off in later years only against specified business profits
Any balance continues to be carried forward "and so on". The text of Section 114 reproduced on this page does not state a maximum number of years.
Practical checklist
Do
- Identify the Section 46 category for each activity and compute its separate profit or loss.
- Keep a running balance of any specified-business loss not yet set off.
Avoid
- Do not set this loss against profit of an ordinary business that is not a specified business.
- Do not import the eight-year period from Section 112; Section 114 does not state that limit.
Illustrative example
Worked example: specified business loss kept separate
Hypothetical facts (illustration only, not a real taxpayer): In Tax Year 1, ABC Ltd. has a loss of ₹8,00,000 from a specified business referred to in Section 46 and a profit of ₹5,00,000 from an ordinary trading business. It has no other specified business that year. In Tax Year 2 its specified business earns ₹3,00,000.
Tax Year 1
The ₹8,00,000 cannot be set off against the ₹5,00,000 ordinary business profit. Whole ₹8,00,000 is carried forward.
Tax Year 2
Set off against specified business profit of ₹3,00,000: ₹8,00,000 - ₹3,00,000 = ₹5,00,000 carried forward.
Classification record
Keep documents showing the business is a specified business under Section 46, since the ring-fence depends on that.
Outcome
- Ordinary business profit of ₹5,00,000 is fully taxable in Tax Year 1.
- ₹5,00,000 specified business loss carries forward to Tax Year 3 for use only against specified business profits.
Glossary
- Specified business
- A qualifying business referred to in Section 46 for this loss rule.
- Ring-fenced set-off
- Restricting use of the loss to profits from another specified business.
Frequently asked questions
Can a specified-business loss be set off against income from an ordinary business?
No - Section 114 restricts it to being set off only against profits of another specified business as referred to in Section 46.
What counts as a "specified business" for this section?
It is the category of business referred to in Section 46 of the Income-tax Act, 2025 - refer to that section for the exact list of eligible businesses.
Is there a year limit for carrying forward a specified-business loss?
The text of Section 114 shown on this page provides for carry forward "to the following tax year and so on" and does not itself state a maximum number of years. Do not import the eight-year or four-year limits of Sections 112 or 113 without checking the provisions that apply to your case.
Need help applying this provision to your situation?
Talk to our tax team about specified-business loss set-offLast updated 9 October 2026