Section 108 Set off of losses under same head of income.

Income-tax Act, 2025

At a Glance

These materials compare Clause 108 of the Income Tax Bill, 2025 - (Old Version) with Section 108 as enacted in the Income-tax Act, 2025. Both provisions regulate intra-head set-off of losses, including the special rules for capital gains. The provisions affect taxpayers who realise losses and gains under the same head (notably capital gains) and the tax administration that applies set-off rules. Effective date or decision date: Not stated in the document.

Background & Scope

Statutory hook: Chapter VII, "Set off, or Carry Forward and Set off of Losses," Income-tax Act/Bill, 2025. The clauses address intra-head set-off of losses. The text explicitly excludes "Capital gains" from the general rule in sub-section (1) and then dedicates sub-section (2) to rules for capital gains losses u/ss 72 to 90. Definitions of "short-term capital asset" and "long-term capital asset" are Not stated in the document. Cross-references: sections 72 to 90 are referenced as the computational framework for capital gains; the content of those sections is Not stated in the document.

Statutory Provision Mode

Text & Scope

Clause 108 (Old Version) contains two operative parts:

• Sub-section (1): A general rule for the same head (excluding capital gains). If the net result from any source under any head of income (other than "Capital gains") is a loss for a tax year, the assessee may set off such loss against income from any other source under the same head for that tax year.

• Sub-section (2): Specific rules for capital gains losses computed u/ss 72-90. Losses arising from transfer of a capital asset are classified by whether the asset is long-term or short-term and the set-off permitted differs accordingly:

  • (a) Loss arising from transfer of a long-term capital asset shall be set off only against gains, if any, from transfer of another long-term capital asset.

  • (b) Loss arising from transfer of a short-term capital asset shall be set off against gains, if any, from transfer of any capital asset.

Interpretation

Legislative intent as expressed by the text: the statute draws a distinction between capital gains and other income heads. It preserves the conventional tax treatment that long-term capital losses are more restricted - they cannot be used to offset short-term capital gains or other forms of income - whereas short-term capital losses are more freely available against gains from any capital asset. The language indicates an intent to confine cross-category set-off within the capital gains head to protect the treatment accorded to long-term capital gains (often taxed differently) while allowing short-term losses to mitigate capital gains across categories.

Exceptions/Provisos

No provisos, exceptions, time-limits or carry-forward rules are stated in Clause 108 of the Bill. Carry-forward of unabsorbed losses, conditions for set-off in subsequent years, or special carve-outs (e.g., for specified transactions) are Not stated in the document.

Illustrations

• Example 1: Taxpayer A has, in one tax year, a loss of Rs. 100,000 on transfer of a short-term equity holding (short-term capital loss) and a gain of Rs. 80,000 on transfer of a long-term property (long-term capital gain). Under Clause 108(2)(b) the short-term capital loss can be set off against the long-term capital gain. (All numeric facts hypothetical but consistent with the text.)

• Example 2: Taxpayer B has a long-term capital loss of Rs. 50,000 from sale of a long-term asset and a short-term capital gain of Rs. 30,000 in the same year. Under Clause 108(2)(a) the long-term loss cannot be set off against the short-term gain; it may be set off only against gains from transfer of another long-term capital asset. If no such gains exist, set-off in that year is precluded by Clause 108(2)(a).

Interplay

Clause 108 cross-references sections 72 to 90 as the computational framework for capital gains: the Bill contemplates that capital gains/loss computation, classification and quantum will be governed by those sections. Other interactions - for example with provisions on carry-forward and set-off across subsequent years, tax rates, or special exemptions - are Not stated in the document.

Summary of Differences between Clause 108 of the Income Tax Bill, 2025 - (Old Version) with Section 108 of the Income-tax Act, 2025

• Structure and Wording of Capital Gains Set-off Rules
  Difference: Section 108(2) of the Act divides capital asset losses into two specific categories: (a) short-term capital asset loss set off against income from any other capital asset; and (b) long-term capital asset loss set off only against income from any other long-term capital asset. The Bill (Clause 108(2)) reverses the emphasis and frames the rule as: (a) loss from a long-term capital asset shall be set off only against gains (if any) from transfer of another long-term capital asset; (b) loss from a short-term capital asset shall be set off against gains (if any) from transfer of any capital asset.

  Practical impact: The Act's text appears to permit short-term losses to be set off against any other capital asset income (which would include both STCG and LTCG), and long-term losses only against other long-term capital income. The Bill's text expressly states the converse ordering but functionally is similar except for phrasing: Bill explicitly allows short-term losses to be set off against gains from any capital asset (including long-term), and restricts long-term losses to long-term gains only. The primary practical consequence is clarity: the Bill is explicit that long-term capital losses cannot be used against short-term capital gains, whereas the Act also contains that restriction but phrases the short-term rule as set off against "any other capital asset" which may be read the same; the Bill's framing is marginally clearer on the directional limitation for long-term losses.

• Placement and Minor Wording Variations
  Difference: The Act uses the heading "(2) Where the net result of computation of income made for any tax year u/ss 72 to 90 in respect of-" followed by two subparagraphs (a) and (b) specifying short-term and long-term capital assets. The Bill uses "(2) Any loss, as a result of computation made u/ss 72 to 90, for any tax year, arising from transfer of a capital asset as arrived at under a similar computation made for the tax year in respect of any other capital asset being,--" followed by (a) and (b).

  Practical impact: This is a drafting difference only; the Bill's version is slightly more verbose and emphasizes that the loss is "arising from transfer of a capital asset." No substantive change in coverage is evident from the texts provided.

• Explicit Cross-References to "Capital gains" Exclusion
  Difference: Both texts exclude "Capital gains" from clause (1) by the parenthetical "(other than "Capital gains")" when addressing set-off under the same head. There is no substantive difference here.

  Practical impact: No change; both provisions maintain capital gains as a special category requiring separate rules under clause (2).

• Overall Substance
  Difference: There is no substantive divergence in the fundamental rule that losses under the same head can be set off against other sources within that head and that capital gains have specialized set-off rules distinguishing short-term and long-term losses. The Bill's text is slightly different in ordering and phraseology concerning which category of loss can be set off against which gains.

  Practical impact: Tax practitioners can treat the provisions as substantively aligned; however, reliance on the enacted Act (Section 108) rather than the Bill text is necessary for certainty. The practical effect on taxpayers' ability to set off capital losses appears unchanged: long-term capital losses are confined to long-term capital gains, whereas short-term capital losses may be applied against gains from any capital asset.

Practical Implications

• Compliance and risk areas: Taxpayers must correctly classify capital asset transfers as short-term or long-term (classification rules Not stated in the document) because the permissible intra-head set-off depends on that classification. Misclassification could lead to incorrect set-off, reassessment risk, or tax litigation.
• Record-keeping/evidence: Though the Bill does not prescribe records, taxpayers will need contemporaneous evidence of acquisition date, sale date, and computation of capital gains/losses (Not stated in the document as express requirements). Retention of documentation supporting holding period and computation is implied by the need to establish short-term vs long-term status.
• Tax planning constraints: The rule restricting long-term capital losses to long-term gains limits the utility of such losses to offset short-term gains or other capital gains in the year - affecting timing strategies for disposal of assets where taxpayers seek to utilise losses against higher taxed or immediate gains.

Key Takeaways

• Clause 108 distinguishes general intra-head set-off (excluding capital gains) from specific capital gains set-off rules.
• Long-term capital losses are limited to set-off only against long-term capital gains in the same year.
• Short-term capital losses can be set-off against gains from transfer of any capital asset in the same year.
• The Old Version (Bill) and the enacted Section 108 are substantively consistent; differences are primarily in ordering and phrasing.
• The Bill does not state definitions of short-term/long-term, carry-forward rules, effective date, or administrative procedures - these are Not stated in the document.
• Accurate classification of capital assets and maintenance of records supporting holding periods and computations are essential for correct application.
• Absence of express exceptions or cross-year carry-forward language in Clause 108 means readers must consult other provisions (Not stated here) for such rules.

Full Text:

Section 108 Set off of losses under same head of income.