SET-OFF / CARRY FORWARD OF LOSSES AND DEDUCTIONS 2025 & INCOME TAX RULE ,2026
Q8.1 Has the fundamental principle of set off and carry forward of losses changed under the Income Tax Act, 2025
Ans: No. The core architecture remains the same—losses are first adjusted intra-head i.e., within the same head of income and then inter-head subject to statutory restrictions, after which the balance,if any, is carried forward. The duration for which loss can be carried forward also remain unchanged. The structural comparison is brought out in the
table below:
Q8.2 Can losses computed under the Income-tax Act, 1961 be carried forward under the Income-tax Act, 2025?
Ans: Yes. The position is expressly clarified under the repeal and saving clause contained in section 536 of the Income-tax Act, 2025. Clauses (m) and (n) of section 536(2) expressly provide that losses brought forward for tax years beginning before 1 April 2026 shall continue to be carried forward and set off under the new Act in the manner provided under the corresponding provisions of the repealed Act. Example: Eligible business loss of AY 2023-24 (Income-tax Act, 1961) can be carried forward under the new Income Tax Act, 2025 but total carry forward period cannot exceed the original eight-year limit counted from AY 2023–24.
Q8.3 Are brought-forward losses from “Income from house property” under the old Act still available for set-off under the new Act?
Ans: Yes. Loss from house property brought forward for years before 1 April 2026 can be set off and carried forward under the new Act, in the manner as contained in the section 71B of the old Act.
For example, if Mrs. R had a house property loss in AY 2024–25, that loss can be adjusted against house property income under the new Act in later years.
Q8.4 Are there any provisions in the new Income Tax Act about set-off of brought forward business losses from earlier years under the old Act?
Ans: Yes. Business losses brought forward from years before 1 April 2026 can be set off against only business income and carried forward under the new Act, in the manner provided under section 72 of the old Act. For instance, a taxpayer’s business loss of AY 2023–24 can be adjusted against his business income for Tax Year 2026–27 under the new Act, subject to fulfilment of prescribed conditions.
Q8.5 How are brought-forward capital losses (both long-term and short-term) from earlier years treated under the new Act?
Ans: They can be carried forward and set off against capital gains computed under the new Act, but only in the manner the old Act allowed.
For instance, a long-term capital loss that a taxpayer had in AY 2024–25 can be used for set-off against his long-term capital gains in later years, following the conditions prescribed in the old Act.
Q8.6 If an amalgamation took place in FY2024-25 under section 72A of the Incometax Act, 1961, and the prescribed conditions are violated in FY 26-27, which Act governs the taxability of such violation?
Ans: If the statutory conditions prescribed under section 72A of the Income Tax Act, 1961—such as continuation of business or maintenance of prescribed levels of assets— are violated in a tax year beginning on or after 1st April, 2026 (say FY 2026-27), the consequences of such violation are determined under section 536(2)(o) of the Income Tax Act, 2025. This clause specifically provides that where any set-off of loss or allowance for depreciation was made before 1 April 2026 under section 72A of the old Act, and the stipulated conditions are subsequently not complied with, the amount so set off shall be deemed to be the income of the amalgamated (or successor) entity in the tax year of violation. Accordingly, the deemed income arising in tax year 2026-27 will be chargeable to tax under the Income-tax Act, 2025.
Q8.7 Are losses computed under the Income-tax Act, 1961 preserved in their original nature under the Income-tax Act, 2025, or does the new Act reclassify them under different heads of income?
Ans: The Income-tax Act, 2025 does not reclassify losses determined under the Income-tax Act, 1961 into different heads of income. Section 536 (repeal and saving clause) explicitly preserves the original character of such losses. Under sections 536(2)(m) and (n), losses retain their original nature—business, speculation, capital, etc.—and are carried forward and set off as per the corresponding provisions of the repealed Act. Thus, old losses are not converted or re-characterised; only their carry forward and set‑off continues under the corresponding head in the 2025 Act.
Q8.8 If loss return for AY 2024-25 was filed belatedly under Income Tax Act, 1961, can it be carried forward under Income Tax Act, 2025?
Ans: No. If the loss return for AY 2024–25 was filed belatedly and did not meet the conditions of section 139(3) read with section 80 of the Income-tax Act, 1961, the loss cannot be carried forward. Since the tax year falls before 1 April 2026, carry-forward eligibility is governed solely by the old Act. The repeal and saving clause in section 536 of the Income-tax Act, 2025 preserves only validly determined losses and does not remedy defects or revive ineligible claims. Therefore, losses not eligible for carryforward under the 1961 Act cannot be carried forward under the 2025 Act.
Q8.9 Has the restriction on set-off of losses against undisclosed income changed under the Income Tax Act, 2025?
Ans: No. The restriction has remained the same in principle. Section 120 Income Tax Act, 2025 bars set-off of brought forward losses and/or unabsorbed depreciation against undisclosed income included in the total income of assessee consequent to search, requisition, or survey proceedings just like section 79A of Income-tax Act, 1961. Deductions
Q8.10 Has the basic deduction for specified savings instruments as available under section 80C of the old Act changed under the Income-tax Act, 2025?
Ans: No. Section 123 of the Income-tax Act, 2025 retains the Rs 1.5 lakh aggregate deduction for specified savings instruments for individuals or HUF, structurally similar to Section 80C read with 80CCE of the Income Tax Act, 1961. The eligible instruments are now placed in Schedule XV, but the nature of qualifying payments such as life insurance, provident fund, tuition fees, etc., remains unchanged in substance.
Q8.11 Whether assessee can claim deduction under section 123 of the 2025 Act, under the New Tax Regime?
Ans. No, deduction under section 123 of the Act is not allowed to the assessee under the new concessional tax regime under section 202.
Q8.12 Is timely furnishing of return mandatory for claiming deductions under Part C of Chapter VIII of Income-tax Act, 2025, even if the income otherwise qualifies?
Ans: Yes. Under Section 122(5) of the Income-tax Act, 2025, furnishing the return of income within the prescribed due date is a statutory pre-condition for claiming deductions under Part C of Chapter VIII of Income-the tax Act, 2025.This continues the legislative policy earlier reflected in Section 80AC of the old Act that compliance with return furnishing timelines is integral to deduction entitlement.
Q8.13 Where a profit-linked deduction under section 80-IA of the Income-tax Act, 1961 was allowed for certain number of years, can the assessee continue to claim it after 1 April 2026?
Ans: Yes, but only for the remaining period and in manner as provided in the original Income-tax Act, 1961. The Income-tax Act, 2025 contains specific transitional provisions (for example, sections 138, 139, 141, 142, etc.) that permit continuation of deductions in respect of eligible businesses where the assessee would have remained eligible under the Income-tax Act, 1961 had it not been repealed. The deduction is not freshly granted under the new Act but is allowed as a continuation of the old Act. The continuation is strictly time-bound. If under the Income-tax Act, 1961 the deduction was available for ten consecutive years, the assessee may claim deduction for the remaining years after 1 April 2026 as would have been claimed under the old Act, but cannot extend the benefit beyond that statutory window.
Q8.14 If conditions attached to a deduction claimed under the Income Tax Act, 1961 are violated after 1 April 2026, under which Act will the tax consequences arise?
Ans: The issue is specifically governed by Section 536(2)(h) of the Income-tax Act, 2025 (Repeal and Savings).This clause provides that where, under the repealed Act, such sum would have been required to be included in total income upon violation, the same shall be deemed to be the income of the assessee for the tax year in which the violation takes place and shall be included under the same head of income as it would have been included under the repealed Act.
Q8.15 Do pending appeals or assessments or reassessments or other proceedings relating to deductions under Chapter VI-A of the income Tax Act, 1961 continue under the old Act?
Ans. Yes. The section 536(2)(c) of Income Tax Act, 2025 clearly states that proceedings pending on the date of commencement of the Income-tax Act, 2025, or initiated thereafter in respect of tax years beginning before 1 April 2026, shall continue to be governed by the repealed Act. This includes assessment, reassessment, rectification, revision, penalty proceedings and appellate proceedings. Accordingly, if an appeal relating to disallowance of deduction under section 80P or 80-IA is pending, the matter will be decided under the Income-tax Act, 1961. Similarly, if deduction under Chapter VI-A was wrongly allowed, reassessment can still be initiated under the framework of
the Income-tax Act, 1961 despite its repeal.
Q8.16 If a housing project eligible under section 80-IBA of the Income-tax Act, 1961 continues beyond 01.04.2026, can deduction still be claimed?
Ans: Yes, subject to section 142 of the 2025 Act, which allows deduction for such tax years as would have been allowed under section 80-IBA of the 1961 Act (as if not repealed). Accordingly, if a housing project had validly qualified under section 80-IBA of the Income-tax Act, 1961, the deduction may continue for the remaining period, provided all conditions of the original provision are satisfied. The computation and eligibility remain governed by the framework of the repealed Act, but the deduction is granted under section 142 of the Income-tax Act, 2025.
Q8.17 If an option or declaration was exercised under the Income Tax Act, 1961, does it survive repeal?
Ans: Yes, subject to Section 536(2)(f) of the Income-tax Act, 2025. This clause provides that any election, declaration or option exercised under the repealed Income-tax Act, 1961 and in force immediately before commencement of the Income-tax Act, 2025 shall be deemed to have been exercised under the corresponding provision of the new Act. Thus, continuity is preserved where the new Act contains a parallel or mapped provision. However, if the Income-tax Act, 2025 does not have a parallel provision, the earlier option cannot independently survive beyond the scope preserved by the saving clause. The deeming fiction operates only to the extent a corresponding statutory framework exists in the new law.
Q8.18 Can repeal of old Act affect the computation base for deduction if business income is computed under the Income-tax Act, 2025?
Ans: Yes. For tax years beginning on or after 1 April 2026, business income is computed under the Income-tax Act, 2025, even if the deduction itself is grandfathered from the Income-tax Act, 1961. While the eligibility for deduction may flow from the preserved provisions of the old law, the quantum of eligible profit is determined under the computation mechanism of the new Act. In simple terms, the right to claim deduction may come from the old regime, but the profit figure on which it is calculated comes from the new regime.
Example: Suppose an undertaking eligible under section 80-IA (Income Tax Act, 1961) has two years of deduction remaining after 01.04.2026. For FY 2027-28, its business income is computed under the Income-tax Act, 2025. If the recomputed business profit
under the new Act is Rs 8 crore instead of Rs 8.5 crore under the old Act, the deduction will apply to Rs 8 crore and not Rs 8.5 crore.
Q8.19 Can a deduction be claimed after 01.04.2026 if the undertaking had not satisfied eligibility conditions before repeal — but an identical provision exists in the Income Tax Act, 2025?
Ans: Yes, but only if the undertaking independently satisfies the eligibility conditions under the Income-tax Act, 2025 on fresh verification. If the new law contains a corresponding or identical deduction provision, the assessee’s claim will be examined under the conditions of the Income-tax Act, 2025. In that case, the claim is not a continuation of an old right; it is a fresh claim under the new statute. The undertaking
must satisfy all conditions as required under the Income-tax Act, 2025 for the relevant tax year.
Q8.20 If a deduction was partly disallowed under the Income Tax Act, 1961 and the appeal is decided after repeal, which law governs?
Ans: The matter will be governed by the Income-tax Act, 1961. Under Section 536(2)(c), (d) and (e) of the Income-tax Act, 2025, any proceeding relating to a tax year beginning before 1 April 2026 — including appeal, reassessment, rectification or penalty — shall continue and be disposed of as if the Income-tax Act, 1961 had not been repealed. Therefore, the appellate authority will determine the entitlement strictly under the provisions of the Income-tax Act, 1961. However, if the appellate decision has consequences for subsequent tax years (for example, affecting carry forward of losses or quantum of unabsorbed depreciation), the forward impact for the tax years beginning from 1.04.2026 and onwards, will operate within the computational framework of the Income-tax Act, 2025.
Example: Suppose for AY 2025-26, an assessee claimed Rs 10 crore deduction under section 80-IA, but the same was reduced to Rs 7 Crore by AO. The appeal is decided in FY26-27 (after repeal) as per provisions of old Act, and the appellate authority allows the full Rs 10 crore deduction. The question of whether deduction of Rs 3 crore was allowable, will be decided under the Income-tax Act, 1961. If that decision affects carry forward of business loss or MAT credit into TY 2026-27 onwards, the carry forward survives by virtue of Section 536, but its utilisation in future years will be governed by the provisions of Income-tax Act, 2025.
Q8.21 Has the relationship between Gross Total Income (GTI) and the deduction ceiling changed in Income Tax Act, 2025
Ans: No, there is no change. Under section 80A of the Income Tax Act, 1961, deductions under Chapter VI-A could not exceed the Gross Total Income (GTI). The same principle continues under the Income Tax Act, 2025 vide section 122 of the same – total deductions cannot exceed the GTI of the assessee.
Q8.22 If a search was initiated in March 2026 and a Chapter VI-A deduction is under scrutiny, which Act applies?
Ans: The Income-tax Act, 1961 will apply. If a search was initiated before 1 April 2026, the entire proceeding – including assessment, reassessment, penalty and appeal – will continue under the Income-tax Act, 1961, even if the assessment order is passed after 01.04.2026. This position is expressly protected by the saving clause in Section 536(2)(v) of the Income-tax Act, 2025, which states that where a search has been initiated under section 132 (or requisition under section 132A) before commencement of the Income-tax Act, 2025, the provisions of the repealed Act shall continue to apply as if the new Act had not been enacted.
Q8.23 Is a revision under Section 263 of the Income-tax Act, 1961 by the CIT, after repeal, for AY 2024–25 involving an 80IA claim still valid?
Ans: Yes, it is valid. AY 2024-25 is a tax year beginning before 1 April 2026. Under Section 536(2)(c) and (e) of the Income-tax Act, 2025, any proceeding relating to a tax year prior to 1 April 2026 – including revision – shall continue and be disposed of as if the Income-tax Act, 1961 had not been repealed.
Q8.24 If an assessee had opted for a specific deduction regime under the Income Tax Act, 1961, does that option automatically migrate into the Income Tax Act, 2025?
Ans: It continues only if the saving clause specifically protects it. Under Section 536(2)(f) of the Income-tax Act, 2025, any election, declaration or option exercised under the Income Tax Act, 1961 and in force immediately before repeal is deemed to have been exercised under the corresponding provision of the Income Tax Act, 2025 — but only if a corresponding provision exists. This means the old option survives only where the new law contains a mapped continuation. It does not create a permanent or independent right.
Q8.25 Whether provisions to prevent inflation of eligible profits through inter-unit transfers provided in the Income-tax Act, 1961 are incorporated in the Income-tax Act, 2025?
Ans: Yes. Both the Income-tax Act, 1961 and the Income-tax Act, 2025 contain similar anti-abuse safeguards to prevent artificial inflation of profits of an eligible undertaking through inter-unit transfers.
Q8.26 How are deductions claimed under the old Act dealt with if the conditions attached to them are breached in a subsequent year after the new Act comes into force?
Ans: When a deduction granted in earlier years under the old income tax Act was subject to conditions, and those conditions are breached in a later year after the new Act has come into effect, the previously allowed benefit will be reversed. The amount earlier deducted (or excluded from total income) is then taxed as income in the year of violation as per provisions of the new Act.
Q8.27 If exemption was claimed under Sections 54 of the Income-tax Act, 1961, and the new asset is transferred after 1 April 2026 but within the prescribed lockin period, how will the withdrawal of exemption be taxed under the Income-tax Act, 2025?
Ans: Where exemption was originally claimed under Sections 54, 54B, 54F, etc., of the Income-tax Act, 1961 and the new asset is transferred after 1 April 2026 but within the prescribed lock-in period, Section 536(2)(h) of the 2025 Act applies. It provides that if conditions attached to a deduction or exemption granted under the repealed Act are violated after commencement of the new Act, the amount earlier claimed as exempt shall be deemed to be income of the assessee in the year of violation. For instance, if a house (being the new asset for claiming exemption from capital gains) purchased in March 2025 is sold in May 2027 (within three years), the earlier exempted capital gain will be taxed in Tax Year 2027–28 under the Income-tax Act, 2025, but the triggering condition and quantum will be determined as per Section 54 of the old Act.
Q8.28 How will amounts deposited before 1 April 2026 in the Capital Gains Account Scheme under the Income-tax Act, 1961 be taxed if they remain unutilised after the prescribed period, and will such taxation be governed by the old Act or the Income-tax Act, 2025?
Ans: If an assessee deposited unutilised capital gains in the Capital Gains Account Scheme under the Income-tax Act, 1961 before 1 April 2026, such deposit continues to be governed by the conditions of the old Act. If the amount is not utilised within the prescribed period (for example, three years under Section 54), then as per Section 536(2)(h), the unutilised portion will be taxed in the year in which the time limit expires. For example, if the transfer occurred in June 2024 and the deposit remains unutilised till June 2027, the amount becomes taxable in Tax Year 2027–28 under the new Act, but computation follows the old exemption structure.
Q8.29 How are violations of conditions under Sections 47(xiii), 47(xiiib) and 47(xiv) treated after repeal of Income Tax Act, 1961?
Ans: Sections 47(xiii), 47(xiiib) and 47(xiv) of the 1961 Act granted capital gains exemption on conversion of firm to company, company to LLP, and proprietary concern to company, respectively, subject to continuity and shareholding conditions. If these conditions were not complied with, the exemption would be withdrawn under Section 47A. Section 536(2)(q)(B) of the 2025 Act provides that if such non-compliance occurs after 1 April 2026, the previously exempted capital gains shall be deemed taxable under the 2025 Act in the year of violation. Therefore, the repeal does not absolve entities from compliance with post-conversion lock-in conditions.
Q8.30 Do multi-year deductions as provided in sections 35ABA, 35ABB, 35D, 35DD, 35DDA, 35E or the first proviso to section 36(1)(ix) of the Income Tax Act, 1961 (like preliminary expenses, telecom/licence fees amortized over several years, etc.) claimed under the old Act continue under the new Act?
Ans: Yes. As per section 536(2)(s) of the Income Tax Act, 2025, these deductions continue for the remaining years under the new Act, provided the conditions are met. For example, if M/s. ABC started claiming a preliminary expense deduction in five equal parts from AY 2025-26, it will continue to get the remaining portions in AY 2026–27 and later years under the new Act.
Q8.31 A telecom company incurred expenditure for obtaining right to use spectrum for telecommunication services before 01.04.2026 and had started claiming a multi-year deduction u/s 35ABA of the old Act. Will it lose the balance after the new Act commences?
Ans: No. The deduction continues for the remaining years under the new Act, provided the conditions are met.
For example, XYZ Telecom Ltd. paid a license fee in FY2024-25 and had already claimed two years of deduction before the new Act commenced. From Tax Year 2026–27, the remaining deduction becomes part of the new Act’s deferred expenditure allowance, and the company will continue claiming it each year subject to fulfilment of conditions prescribed.
Q8.32 Whether unabsorbed depreciation from AY prior to 2026 continues with unlimited carry forward under 2025 Act?
Ans. Yes. By virtue of saving clause, character and time-limit (or absence thereof) remains intact.