Set-Off Of Losses Under The Old And New Income Tax Act: What Changes From 1 April 2026

If you have been running a business for a years you already know that losses are not just bad news on paper. They are an asset that you carry forward hoping that future profits will absorb them and cut your tax outgo. With the Income Tax Act 2025 replacing the six-decade- Income Tax Act, 1961 from 1 April 2026 people keep asking me one thing: will my old losses survive the transition or do I lose them?

The short answer is that your Income Tax Act 2025 losses are safe. The mechanics deserve a proper explanation because the transitional provisions are where most confusion and most compliance mistakes tend to show up.

Why Set-Off Provisions Matter So Much

The Income Tax Act 2025 set-off of losses exists because tax should be levied on net income not on one profitable business while ignoring a loss-making business sitting right next to it. A trader running two business lines one one not should not be taxed as though only the profitable line existed. The Income Tax Act 2025 law recognises this through -head adjustment and inter-head adjustment each with its own rules.

Under the Income Tax Act, 1961 these rules lived in Sections 70 to 80. Section 70 dealt with adjustment within the head Section 71 covered adjustment across heads Section 71B handled house property losses specifically and Sections 72 to 74 governed carry forward of business losses speculation losses and capital losses. Section 79 added restrictions where a held company underwent a change in shareholding.

The Legal Framework Under the New Income Tax Act 2025

The Income Tax Act 2025 has not reinvented this wheel. It has. Reorganised it. Section 108 now governs set-off within the head of income and Section 109 covers inter-head adjustment. Carry forward provisions spread across Sections 72 to 74A now sit within Sections 110 to 119 dealing separately with business losses speculation losses, capital losses and specified-business losses under the erstwhile Section 35AD framework.

The substantive restrictions have not gone anywhere. A loss under "Profits and gains of business or profession" still cannot be set off against salary income. A loss under "Capital gains" still cannot be adjusted against any head. House property loss can be set off against any head but only up to ?2 lakh in a year with the balance carried forward. The CBDT has confirmed in its published FAQs that the core architecture remains unchanged.

The Transitional Rule That Actually Matters

This is the part people genuinely need to understand. Section 536 of the Income Tax Act 2025 is the repeal and savings clause and clauses (m) and (n) of Section 536(2) do the heavy lifting here. They provide that any loss brought forward from a tax year beginning before 1 April 2026 will continue to be carried and set off under the new Income Tax Act, 2025 but strictly in the manner the old Income Tax Act 1961 would have allowed.

Practically this means three things. First the character of the loss does not change. A business loss stays a business loss a speculation loss stays a speculation loss and so on. Second the carry-forward clock does not reset. If a business loss was incurred in AY 2023-24 it still has to be absorbed within the eight-year window counted from that year not eight fresh years from 2026. Third eligibility conditions attached to the loss still control whether that loss can be carried forward at all.

Practical Examples

Example 1: A manufacturing firm had a business loss of ?40 lakh for AY 2022-23 carriable for eight assessment years i.e. up to AY 2030-31. That window does not restart because a new Income Tax Act, 2025 came in.

Example 2: A salaried individual with a property incurred a house property loss of ?3 lakh in FY 2024-25. She set off ?2 lakh against salary that year. Carried forward ?1 lakh. That balance remains available for set-off against house property income under the new Income Tax Act, 2025.

Example 3: A held private company changed 60% of its shareholding in FY 2025-26. Under Section 79 this could block carry forward of pre-existing losses unless the beneficial-ownership continuity test was met. That restriction does not disappear.

Mistakes People Make

Business owners often assume that a "new law" means a clean slate for losses and that is simply wrong. Another frequent error is missing the filing deadline for the loss year. If the return was not filed within the date under the old Income Tax Act, 1961 the loss forfeits its carry-forward eligibility permanently regardless of which Income Tax Act 2025 applies afterward.

Compliance Tips

Keep a year-wise ledger of every carried-forward loss noting the original assessment year the section under which it arose and the expiry year for carry forward. File returns within the date every single year. A belated return can silently kill your right to carry forward a loss when everything else about the loss is genuinely valid.

Frequently Asked Questions

1. Does my carried-forward capital loss lapse because of the Income Tax Act, 2025? No. It survives with its character and expiry timeline intact.
2. Will unabsorbed depreciation also transition smoothly? Yes unabsorbed depreciation continues to be available for set-off under the Income Tax Act, 2025 following the same continuity principle as other losses.
3. Do I need to refile anything to carry my losses into the new Income Tax Act 2025? No fresh election is required for the loss itself though your annual return will now be filed on new-Act forms referencing the provisions.

The move from the 1961 Income Tax Act to the 2025 Income Tax Act changes section numbers and terminology more than it changes substance when it comes to set-off and carry forward of losses. Your existing losses are protected. Only if the underlying compliance was sound in the first place. If you are unsure how a specific loss maps across the two Income Tax Acts that is the kind of transitional question worth running past your tax advisor, before your next return is due.