Section 109 of the Income-tax Act, 2025 — Set Off of Losses Under Any Other Head of Income (Inter-Head Set-Off)

In plain language

What Section 109 actually means

Section 109 of the Income-tax Act, 2025 governs inter-head set-off — the rule that lets you use a loss under one head of income to reduce your taxable income under a different head in the same tax year. It is the direct successor to Section 71 of the old Income-tax Act, 1961, carried into the new Act (effective 1 April 2026) with the same core logic but written in simpler language.

India's income tax law splits your income into five heads: Salaries, Income from house property, Profits and gains of business or profession, Capital gains, and Income from other sources. First you set off losses within the same head under Section 108 (intra-head set-off). Whatever loss still remains can then, subject to conditions, be set off across heads under Section 109.

The general rule

• Loss under any head (other than Capital gains) can be set off against income under any other head — including capital gains income — for that tax year.
• This reduces your total taxable income and therefore your tax outgo for the year.
• It applies to all taxpayers — individuals, HUFs, firms, companies — who have income under more than one head.

The three key restrictions (conditions)

• Business loss cannot touch salary: A loss under "Profits and gains of business or profession" cannot be set off against income under "Salaries". A salaried person running a side business at a loss cannot use that loss to shrink taxable salary.
• House property loss is capped at ₹2,00,000: Loss under "Income from house property" can be set off against other heads only up to ₹2,00,000 in a tax year. This is important for those with home-loan interest on let-out or self-occupied property — interest often creates a house-property loss, but only ₹2 lakh of it can offset salary or other income each year. The unabsorbed balance is carried forward.
• Capital gains loss stays inside capital gains: A loss under "Capital gains" cannot be set off against any other head. It can only be set off against capital gains (and then only per the same-head rules — short-term loss against both STCG and LTCG, long-term loss only against LTCG). It can never reduce salary, business or other-source income.

How it interacts with related sections

• Section 108 (intra-head / same-head set-off) comes first — you must exhaust set-off within the same head before Section 109 applies across heads.
• Section 112 onwards (carry forward) apply next — any loss that cannot be set off in the current year (e.g. house-property loss above ₹2 lakh, or capital loss with no capital gain) is carried forward to future years under the relevant carry-forward provision.
• Speculative business loss, "specified business" loss and loss from owning racehorses continue to have their own restrictive treatment and are generally not available for free inter-head set-off.

Practical implications

• A house-property loss (typically from home-loan interest) is the most common real-world use of Section 109 — but remember the hard ₹2,00,000 annual ceiling.
• If you have chosen the new tax regime as your default, note that many loss set-offs (especially house-property loss against other heads) are curtailed under the regime rules — check the regime provisions before assuming a set-off is available.
• Correct ordering matters: same-head first (Section 108), then inter-head (Section 109), then carry-forward. Getting the sequence right maximises current-year relief.