Deductions from total income and set-off and carry-forward of losses

In short

After the five heads of income are computed, losses are adjusted (set-off and carry-forward) to arrive at gross total income (GTI), and statutory deductions are then subtracted from GTI to give total income, on which tax is charged. The Income-tax Act, 2025 replaced the Income-tax Act, 1961 with effect from 1 April 2026 and renumbered every section and form; the deductions formerly in Chapter VI-A and the loss provisions formerly in Chapter VI survive in substance, so this note names each provision and gives the familiar 1961 number only as the former reference. The topic is scored heavily in CA Intermediate and Final Taxation, B.Com/M.Com direct-tax papers and CS/CMA exams, because almost every total-income computation question tests the order of set-off and at least four deductions. In practice it drives tax planning, Form 16 and investment declarations, employer payroll, ITR preparation and the deferred-tax working of loss-making companies.

Explained

The computation chain, and the rules that bind all deductions

• Order: compute each head → intra-head set-off → inter-head set-off → GTI → deductions → total income → tax on total income → rebate (former section 87A) → surcharge → cess → relief (former sections 89/90) → TDS/advance tax.
• Deductions can never exceed GTI: total income cannot become negative or create a loss, and the unabsorbed portion of a deduction is not carried forward (except profit-linked deductions with their own rules).
• No deduction is allowed against casual income (lottery, crossword, betting, online games), nor against incomes taxed at special rates such as long-term capital gains and short-term capital gains on listed equity.
• No double deduction: an amount allowed as a deduction under one provision cannot be claimed again under another; an amount allowed as business expenditure cannot be claimed again as an investment deduction.
• Timely filing: profit-linked deductions (the former 80-IA to 80-IE, 80-IAC, 80JJAA, 80P, 80QQB, 80RRB) are forfeited if the return is filed after the due date (the former section 80AC). Payment-based deductions such as the 80C and 80D type are not subject to that bar.
• Deductions are claimed by the person who paid, out of taxable income, and most require non-cash payment.

Default (new) regime versus the old regime — what survives

• The concessional regime (former section 115BAC) is the default from AY 2024-25; the old regime must be opted into. Business/profession assessees opting out may return only once.
• Not available in the default regime: the former 80C/80CCC/80CCD(1), 80CCD(1B), 80D, 80DD, 80DDB, 80U, 80E, 80G, 80GG, 80TTA/80TTB, housing-loan interest on a self-occupied house, and set-off of house-property loss against other heads.
• Available in the default regime: standard deduction on salary (₹75,000) and on family pension; employer's NPS contribution (former 80CCD(2)) up to 14% of salary in the default regime (10% for a non-government employer in the old regime, 14% for government employees); Agniveer Corpus Fund (former 80CCH); 80JJAA new-employment deduction; employer's contributions generally; and deduction for a let-out property's interest within the head itself.
• Under the default regime, income up to ₹12 lakh bears no tax because of the rebate (₹12.75 lakh for a salaried person after standard deduction) — slab rates and the rebate are fixed by the annual Finance Act, so verify the year's figures.

Deductions for savings, insurance and pension

• Former 80C — ₹1,50,000: life insurance premium (within 10% of sum assured), EPF/PPF/NSC, 5-year bank or post-office deposits, ELSS, ULIP, Sukanya Samriddhi, tuition fees (not donation/development fees) for up to two children, repayment of principal of a housing loan, stamp duty on house purchase. Deduction is on payment basis, not accrual.
• Former 80CCC — pension fund of an insurer; former 80CCD(1) — employee/self-employed NPS contribution, capped at 10% of salary (20% of GTI for the self-employed).
• Combined ceiling (former 80CCE): 80C + 80CCC + 80CCD(1) ≤ ₹1,50,000.
• Former 80CCD(1B) — additional ₹50,000 for NPS, over and above the ₹1.5 lakh ceiling; the NPS Vatsalya contribution for a minor child was brought within a ₹50,000 limit by Finance Act 2025.
• Former 80CCD(2) — employer's NPS contribution, deductible over and above all the above limits (14%/10% of salary as described).
• Premature withdrawal or surrender (e.g. closing a 5-year FD or an insurance policy before the minimum period) makes the earlier deduction taxable in the year of breach.

Deductions for health, disability and education

• Former 80D: ₹25,000 for self, spouse and dependent children (₹50,000 if the insured is a senior citizen) plus the same limits again for parents. Preventive health check-up up to ₹5,000 is within the limit and may be paid in cash; all other payments must be non-cash. Medical expenditure of a senior citizen without insurance qualifies up to ₹50,000. Lump-sum multi-year premium is spread proportionately.
• Former 80DD: maintenance/treatment of a dependant with disability — flat ₹75,000, or ₹1,25,000 for severe disability (80% or more); certificate in Form 10-IA required.
• Former 80U: same flat amounts for the assessee's own disability. 80DD and 80U are flat deductions, not reimbursement of actual spend.
• Former 80DDB: actual expenditure on specified diseases, capped at ₹40,000 (₹1,00,000 for a senior citizen), reduced by any insurance or employer reimbursement.
• Former 80E: entire interest on an education loan from a bank or approved institution for higher education of self, spouse, children or a ward — no monetary cap, for 8 assessment years from the first year of payment or until interest is fully paid, whichever is earlier. Principal is not deductible.
• Former 80EEB: interest up to ₹1,50,000 on an electric-vehicle loan, only for loans sanctioned up to 31 March 2023. The first-home interest deductions (80EE, 80EEA) are likewise closed to new loans.

Deductions for donations, rent and specified incomes

• Former 80G: donations in four classes — 100% without qualifying limit (PM National Relief Fund, PM CARES, National Defence Fund), 50% without limit (PM's Drought Relief Fund), 100% with limit, and 50% with limit (most approved trusts, the common case). Qualifying limit = 10% of adjusted GTI. Cash donations above ₹2,000 get nothing; donations in kind get nothing; the donee must be registered and must report the donation (Form 10BD/10BE certificate).
• Former 80GGB/80GGC: contributions to political parties or an electoral trust — 100%, no cash allowed; 80GGB for Indian companies, 80GGC for others.
• Former 80GG: rent paid where no HRA is received and neither the assessee, spouse nor minor child owns a house at that place — least of ₹5,000 per month, 25% of adjusted total income, and rent paid minus 10% of adjusted total income; Form 10BA to be filed.
• Former 80TTA — ₹10,000 on savings bank interest (not FD); former 80TTB — ₹50,000 for a resident senior citizen on interest from savings and fixed/recurring deposits. The two are mutually exclusive.
• Former 80QQB/80RRB — ₹3,00,000 each on royalty from authorship of literary, artistic or scientific books and on patent royalty (resident individuals; Form 10CCD/10CCE).
• Business-linked: 80JJAA (30% of additional employee cost for three years, employees earning up to ₹25,000 a month and employed at least 240 days, 150 for apparel/footwear/leather); 80-IAC (eligible start-up, 100% of profits for 3 of the first 10 years, DPIIT-recognised and incorporated within the notified window); 80LA (IFSC units); 80P (co-operative societies); 80JJA (collecting and processing bio-degradable waste).

Set-off of losses: intra-head, then inter-head

Intra-head (same head, former section 70) — loss of one source set off against income of another source under the same head, with these exceptions:

• Speculation loss only against speculation profit; specified business loss (the capital-expenditure-deduction businesses, former 35AD/73A) only against specified-business profit.
• Long-term capital loss (LTCL) only against LTCG; short-term capital loss (STCL) against STCG or LTCG.
• Loss from owning and maintaining race horses only against income from the same activity.
• Loss from an exempt source cannot be set off at all (e.g. a loss in agriculture or in an exempt partnership share).
• Loss from the business of growing and manufacturing tea/coffee/rubber is restricted to the taxable fraction.

Inter-head (former section 71) — remaining loss of one head against income of another head in the same year, with these exceptions:

• Business/professional loss cannot be set off against salary.
• House-property loss is set off against other heads only up to ₹2,00,000 a year; the balance is carried forward. In the default regime even this inter-head set-off is denied.
• Capital loss, speculation loss, specified-business loss and race-horse loss are never set off against another head.
• No loss may be set off against casual income or against undisclosed income found in a search (former section 79A).
• The assessee cannot refuse set-off to preserve a deduction: set-off within the year is mandatory.

Carry-forward: periods, conditions and the order of absorption

• Carry-forward is to the same assessee only. Exceptions where the loss moves: inheritance/succession by death, amalgamation and demerger of industrial undertakings on fulfilling conditions (former section 72A — the amalgamated company must hold three-fourths of the book value of fixed assets for five years and continue the business), and amalgamation of banking companies (former 72AA).
• Timely return (former section 139(3)) is a condition for carrying forward business, speculation, capital and race-horse losses. House-property loss and unabsorbed depreciation can be carried forward even with a belated return.
• Non-speculative business loss: 8 assessment years, against any business income — the same business need not continue, but the loss must be of a business, not of another head.
• Unabsorbed depreciation (and unabsorbed scientific-research capital expenditure): carried forward indefinitely, and in the following year it is treated as part of current depreciation and can be set off against any head except salary.
• Order of absorption against business income: (1) current year depreciation, (2) brought-forward business loss, (3) brought-forward unabsorbed depreciation. The sequence matters because the business loss expires in 8 years while depreciation does not.
• Change in constitution of a firm (former section 78): the share of a retired or deceased partner's loss cannot be carried forward by the firm. Closely held company (former section 79): carry-forward is lost unless shareholders holding at least 51% of voting power on the last day of the loss year continue on the last day of the set-off year — relaxed for eligible start-ups (all original shareholders continuing, loss incurred in the first 7 years from incorporation) and for companies whose resolution plan is approved under the IBC or whose board is changed by the Government.
• Companies opting for the concessional corporate rates (former 115BAA/115BAB) forgo brought-forward losses and depreciation attributable to the withdrawn deductions; under the Finance Act 2026, MAT is 14% and is a final tax, so MAT-credit carry-forward planning no longer applies as before.

Key points

• Gross total income - total of the five heads after set-off; total income - GTI minus deductions, rounded to the nearest ₹10.
• Deduction ceiling - deductions cannot exceed GTI and cannot create or increase a loss.
• Former 80CCE - the ₹1,50,000 combined ceiling on 80C + 80CCC + 80CCD(1); 80CCD(1B) and 80CCD(2) sit outside it.
• Former 80D - ₹25,000/₹50,000 for self and again for parents; cash disallowed except a ₹5,000 preventive check-up.
• Flat deductions - 80DD and 80U give a fixed ₹75,000/₹1,25,000 irrespective of actual spending.
• Former 80E - uncapped interest on an education loan for 8 years; principal never qualifies.
• Adjusted GTI - GTI minus LTCG, special-rate STCG, other Chapter deductions and certain incomes of non-residents; the base for the 80G 10% limit.
• Cash limits - above ₹2,000 kills an 80G claim; political contributions must be non-cash entirely.
• Default regime - keeps only standard deduction, employer NPS, Agniveer and 80JJAA type deductions; the rest need the old regime.
• Intra-head before inter-head - and set-off in the year it is available is compulsory, not optional.
• Salary is protected - no business loss and no unabsorbed depreciation can touch salary income.
• House-property loss - inter-head set-off capped at ₹2 lakh a year, balance carried forward 8 years against house-property income only.
• LTCL - only against LTCG, ever; STCL is the more flexible of the two.
• Speculation and race horses - 4 years; specified business - indefinite; business, house property, capital loss - 8 years.
• Unabsorbed depreciation - indefinite, no filing-date condition, and merges with the next year's depreciation.
• Former 139(3) - a loss return filed late forfeits carry-forward of business and capital losses.
• Former section 79 - a closely held company loses carry-forward if 51% beneficial shareholding changes, with start-up and IBC exceptions.
• Casual income - no deduction, no set-off, no basic-exemption benefit; taxed at a flat 30%.

Formulas and examples

Example 1 — deductions from GTI (old regime), individual aged 45 Salary income ₹11,00,000; savings bank interest ₹14,000; LTCG on listed equity ₹1,50,000 → GTI = ₹12,64,000. Claims: LIC ₹40,000 + PPF ₹60,000 + tuition fees ₹50,000 = ₹1,50,000 → 80C allowed ₹1,50,000; NPS ₹50,000 → 80CCD(1B) ₹50,000; mediclaim self ₹22,000 + parents (senior) ₹48,000 → 80D ₹70,000; 80TTA ₹10,000 of ₹14,000; education-loan interest ₹65,000. Total deductions = 1,50,000 + 50,000 + 70,000 + 10,000 + 65,000 = ₹3,45,000. Non-LTCG income ₹11,14,000 exceeds this, so all is absorbed. Total income = 12,64,000 − 3,45,000 = ₹9,19,000, of which LTCG ₹1,50,000 is taxed separately: exempt up to ₹1,25,000, so ₹25,000 × 12.5% = ₹3,125; the balance ₹7,69,000 is taxed at slab rates.

Example 2 — set-off in one year Salary ₹6,00,000; loss from a let-out house ₹(3,50,000); non-speculative business profit ₹2,00,000; speculation loss ₹(80,000); STCL ₹(60,000); LTCG ₹1,40,000; race-horse loss ₹(30,000); lottery winnings ₹50,000.

1. House-property loss: set off against other heads only ₹2,00,000 → salary reduced to ₹4,00,000; ₹1,50,000 carried forward.
2. Speculation loss cannot touch normal business profit → ₹80,000 carried forward (4 years).
3. STCL ₹60,000 set off against LTCG ₹1,40,000 → LTCG ₹80,000.
4. Race-horse loss → ₹30,000 carried forward (4 years); lottery ₹50,000 allows no set-off.

GTI = 4,00,000 + 2,00,000 + 80,000 + 50,000 = ₹7,30,000, with lottery income taxed at 30% and no deduction allowed against it.

Example 3 — order of absorption with depreciation Business income before depreciation ₹5,00,000; current depreciation ₹2,20,000; brought-forward business loss ₹1,50,000; brought-forward unabsorbed depreciation ₹2,00,000; interest income ₹1,00,000.

1. Current depreciation: 5,00,000 − 2,20,000 = ₹2,80,000.
2. Brought-forward business loss: 2,80,000 − 1,50,000 = ₹1,30,000.
3. Unabsorbed depreciation: ₹1,30,000 absorbed → business head nil; balance ₹70,000 set off against interest (allowed against any head except salary) → other sources ₹30,000.

GTI = ₹30,000; nothing left to carry forward.

Example 4 — 80G with the qualifying limit GTI ₹8,00,000 including LTCG ₹50,000. Other deductions: 80C ₹1,20,000, 80D ₹20,000 = ₹1,40,000. Donations: PM National Relief Fund ₹20,000 (cheque); approved charitable trust ₹80,000 (cheque); a temple donation of ₹3,000 in cash. Adjusted GTI = 8,00,000 − 50,000 − 1,40,000 = ₹6,10,000 → qualifying limit = ₹61,000. PMNRF: 100%, no limit → ₹20,000. Trust: eligible amount restricted to ₹61,000, at 50% → ₹30,500. Cash ₹3,000 (> ₹2,000) → nil. 80G = ₹50,500; total income = 8,00,000 − 1,40,000 − 50,500 = ₹6,09,500.

Example 5 — 80GG Rent paid ₹1,80,000; adjusted total income ₹7,00,000; no HRA received. (a) ₹60,000; (b) 25% × 7,00,000 = ₹1,75,000; (c) 1,80,000 − 70,000 = ₹1,10,000. Deduction = ₹60,000 (the least).

Where it is used

• Payroll and HR in every Indian company: investment declarations, Form 12BB proofs, regime choice capture and TDS on salary computed after the available deductions.
• Tax practice and the Big Four / mid-tier firms: ITR preparation, regime comparison workings, loss-carry-forward schedules (Schedule CFL and Schedule BFLA of the ITR) and tax audit under the former section 44AB.
• Corporate tax and finance teams: deferred tax assets on carried-forward losses and unabsorbed depreciation under Ind AS 12/AS 22, judged on probability of future taxable profits.
• M&A and due diligence: testing whether a target's losses survive an amalgamation (former 72A) or a 51% shareholding change (former 79) — frequently a price-adjustment item; start-up and IBC exceptions are checked specifically.
• Banking, insurance and mutual-fund selling: ELSS, PPF, NPS, tax-saver FDs and health policies are sold on these deductions, though demand has shifted since the default regime removed most of them.
• Investor and equity-research work: capital-loss harvesting within the LTCL/STCL rules, and reading a loss-making company's tax disclosures.

Interview questions

• Q: What is the difference between gross total income and total income? A: GTI is the aggregate of the five heads after set-off of losses; total income is GTI less the deductions from total income, and tax is charged on total income.
• Q: Can deductions reduce total income below zero? A: No. Deductions are limited to GTI, and any unabsorbed amount lapses — it is not carried forward.
• Q: Which deductions survive under the default new regime? A: The standard deduction on salary and family pension, the employer's NPS contribution (14% of salary), the Agniveer Corpus Fund deduction and 80JJAA-type business deductions; the 80C, 80D, 80G and similar deductions need the old regime.
• Q: Why is the ₹50,000 NPS deduction attractive even for someone who has exhausted ₹1.5 lakh? A: Because the former 80CCD(1B) sits outside the ₹1,50,000 combined ceiling, so it is genuinely additional — as is the employer's contribution under the former 80CCD(2).
• Q: A client pays a ₹4,000 health-insurance premium in cash. Is it deductible? A: No — health-insurance premium must be paid by any mode other than cash; only preventive health check-up up to ₹5,000 may be in cash.
• Q: Can a business loss be set off against salary income? A: No. Inter-head set-off expressly excludes setting off business or professional loss against salary; unabsorbed depreciation is also barred from salary.
• Q: How much house-property loss can be set off against salary in a year? A: Up to ₹2,00,000 in the old regime; the balance is carried forward for 8 years against house-property income only. The default regime does not permit this inter-head set-off at all.
• Q: Why is unabsorbed depreciation more valuable than a carried-forward business loss? A: It never expires, needs no timely return, and can be set off against any head except salary, whereas a business loss lapses after 8 years and needs income from business.
• Q: Give the order of set-off against current business income. A: Current year depreciation first, then brought-forward business loss, then brought-forward unabsorbed depreciation — so that the time-barred loss is used before the perpetual one.
• Q: A private company's shareholding changes by 60%. What happens to its losses? A: Carry-forward is denied under the former section 79 unless shareholders holding at least 51% of voting power in the loss year continue, with exceptions for eligible start-ups and IBC-approved resolution plans; unabsorbed depreciation is not hit by this bar.
• Q: Can a long-term capital loss be set off against business income? A: No. LTCL can only be set off against LTCG, in the same year or in the next 8 years.
• Q: What is lost if a loss return is filed after the due date? A: Carry-forward of business, speculation, capital and race-horse losses; house-property loss and unabsorbed depreciation can still be carried forward.
• Q: Does the new Act change the substance of these rules? A: The Income-tax Act, 2025 reorganised and renumbered the provisions from 1 April 2026 but kept the structure of deductions and of set-off and carry-forward broadly intact, so the correct practice is to cite the new section after verifying it against the former provision.

Common mistakes

• Deducting 80C-type items in the default regime, or forgetting that the regime choice changes both slabs and deductions.
• Treating 80CCD(1B) or the employer's NPS contribution as part of the ₹1,50,000 ceiling, and adding the employee's own NPS twice.
• Claiming housing-loan principal under the interest provision, or education-loan principal under the former 80E.
• Applying the 10% qualifying limit to 80G donations that have no limit, or computing it on GTI instead of adjusted GTI.
• Setting off a business loss against salary, or setting off LTCL against STCG.
• Using unabsorbed depreciation before the brought-forward business loss, and so letting the 8-year loss lapse.
• Deducting 80C or allowing a basic exemption against lottery winnings or against special-rate capital gains.
• Treating 80DD/80U as reimbursement of actual expenditure instead of the flat ₹75,000/₹1,25,000, and omitting Form 10-IA.

Related topics

Income tax basics · Capital gains · Business income and presumptive taxation · The Income-tax Act 2025: transition from the 1961 Act · Corporate tax basics · TDS and tax filing basics