Section 108 of the Income-tax Act, 2025 — Set Off of Losses Under the Same Head of Income

In plain language

What Section 108 actually says

Section 108 of the Income-tax Act, 2025 governs the intra-head set-off of losses — that is, adjusting a loss from one source of income against a profit from another source that falls under the same head of income, within the same tax year. It is the direct successor to Section 70 of the Income-tax Act, 1961, and the core principle is unchanged: you are taxed on your net income under each head, not your gross earnings.

There are five heads of income: Salaries, Income from house property, Profits and gains of business or profession, Capital gains, and Income from other sources. Section 108 lets you net off losses within the same head before you move on to inter-head set-off (dealt with by Section 109) or to carrying losses forward to future years.

The general rule — Section 108(1)

• Any head except Capital gains: If the net result of computing income from any source under a head is a loss, you can set it off against income from any other source under the same head for that tax year.
• Business example: A loss from your trading business can be adjusted against profit from your consultancy business — both sit under "Profits and gains of business or profession."
• Other sources example: A loss on one activity taxed under "Income from other sources" can be netted against interest or other income under the same head.

The special rule for Capital gains — Section 108(2)

Capital gains are deliberately carved out of the general rule because the Act taxes short-term and long-term gains differently. Section 108(2) applies a strict matching test based on the holding period of the asset:

• Short-term capital loss (STCL): can be set off against income from any other capital asset — meaning it can absorb both short-term (STCG) and long-term capital gains (LTCG).
• Long-term capital loss (LTCL): can be set off only against long-term capital gains (LTCG). It can never be used against short-term gains.

The logic: a short-term loss is "more flexible" and can shelter any capital gain, but a long-term loss is "restricted" and can only shelter long-term gains. This asymmetry existed under Section 74/70 of the 1961 Act and continues here.

Who it applies to

• All assessees — individuals, HUFs, firms, LLPs, companies, and other persons — who have more than one source of income under a single head.
• It is automatic in the sense that it is the first step in loss adjustment, but you must correctly compute and report it in your Income-tax Return (ITR).

Key conditions and limits

• Same head only. Section 108 does not let you cross heads — a business loss cannot touch salary here (that is Section 109's job, subject to its own limits).
• Same year only. Section 108 handles the current year. Amounts that cannot be absorbed this year are carried forward under the relevant carry-forward provisions (Sections 111–120 broadly).
• Speculation and specified losses are ring-fenced. A speculation business loss can be set off only against speculation profits; similarly, losses from the "specified business" and certain other categories retain their own restrictions and are not freely netted against ordinary business income.
• No set-off against exempt income. You cannot set off a loss against income that is exempt from tax.

How it interacts with related sections

• Section 109 (inter-head set-off): Only after intra-head set-off under Section 108 is exhausted do you move to setting off a remaining loss against income under a different head.
• Carry-forward provisions: Any loss still unabsorbed after 108 and 109 may be carried forward, subject to timely filing of the return.
• Order of set-off: Intra-head (108) → inter-head (109) → carry forward. Getting the order right protects valuable long-term loss balances.

Practical implications for taxpayers

• Investors: Booking a short-term loss late in the year is a powerful tool because STCL can absorb both STCG and LTCG. An LTCL is less flexible — plan to have long-term gains available to absorb it.
• Business owners: Running two ventures under one PAN lets you net a loss-making unit against a profitable one automatically under the same head.
• File on time: While the current-year set-off under Section 108 itself does not require timely filing, any carry-forward of the unabsorbed portion generally does — so late filing can permanently waste a loss.