Section 111 Carry forward and set off of loss from Capital gains.

Income-tax Act, 2025

At a Glance

The documents are two versions of Clause/Section 111 dealing with carry forward and set off of loss from "Capital gains": (i) Clause 111 of the Income Tax Bill, 2025 - Old Version (Document 2); and (ii) Section 111 as enacted in the Income-tax Act, 2025 (Document 1). They govern how capital losses that are not absorbed in a tax year are carried forward and set off in subsequent years. The provisions affect taxpayers realizing capital gains/losses and the tax administration in assessing carry-forward claims. Effective date or commencement is Not stated in the document.

Background & Scope

Statutory hooks: the documents are framed as Clause/Section 111 under the heading "SET OFF, OR CARRY FORWARD AND SET OFF OF LOSSES" in the Income Tax Bill/Act, 2025. Both texts address the treatment of losses computed under the head "Capital gains" that are not fully set off in the year of computation. The Bill (old version) expressly defines the term "unabsorbed capital loss" in its subsection (4); the enacted Section uses the phrase "loss computed under the head 'Capital gains'" without introducing the specific term "unabsorbed capital loss." Coverage: carry forward to subsequent years and the order/limitation of set off between short-term and long-term capital losses and gains; temporal limit on carry forward (eight tax years). Definitions or further explanations beyond the term "unabsorbed capital loss" (in the Bill) are Not stated in the document.

Statutory Provision Mode

Text & Scope

Clause 111 (Bill, Old Version) provides a regime for carry forward and set off of "unabsorbed capital loss." Subsection (1) mandates carry forward of any unabsorbed capital loss to the subsequent tax year and directs set off as per subsection (2). Subsection (2) distinguishes between long-term and short-term capital losses: (a) long-term capital losses may be set off only against gains from transfer of other long-term capital assets; (b) short-term capital losses shall be set off against gains from transfer of any other capital asset. Sub-section (3) limits carry forward to not more than eight tax years immediately succeeding the tax year in which the loss was first computed. Subsection (4) defines "unabsorbed capital loss" as loss computed under "Capital gains" not wholly set off u/s 108 for that tax year.

Interpretation

Legislative intent beyond the text is Not stated in the document. Interpretive principles indicated: the text implements a tiered set-off approach reflecting the long-term/short-term distinction and confirms temporal limitation (eight years). The express cross-reference to section 108 in the definition suggests the intended sequence: first apply intra-year set off u/s 108; residual unabsorbed loss becomes eligible for carry forward under Clause 111. Any broader policy intent (e.g., rationale for eight-year limit) is Not stated in the document.

Exceptions/Provisos

No provisos or express exceptions are contained in Clause 111 other than the bifurcated set-off limitation between long-term and short-term losses and the eight-year temporal cap. Specific exemptions, conditions, or special cases (e.g., treatment on change of ownership, mergers, or conversions) are Not stated in the document.

Illustrations

• Example 1: Taxpayer A incurs a long-term capital loss of 1,00,000 in Tax Year 1 and has no long-term capital gains that year. In Tax Year 2, A realises long-term capital gain of 60,000 and short-term gain of 50,000. Under Clause 111, the unabsorbed long-term loss may be set off only against the long-term gain - 60,000 set off - leaving 40,000 carried forward (subject to the eight-year limit).

• Example 2: Taxpayer B has a short-term capital loss of 80,000 in Tax Year 1 and in Tax Year 2 realises long-term capital gain of 30,000 and short-term capital gain of 20,000. The short-term loss can be set off against "capital gains from transfer of any other capital asset," i.e., against both long-term and short-term capital gains; total gains 50,000 are absorbed, leaving 30,000 for carry forward (subject to eight-year limit).

• Example 3: If by the end of eight subsequent tax years the unabsorbed loss remains unutilised, it cannot be carried forward further under subsection (3). (Concrete facts such as exact years or taxpayer identity are Not stated in the document.)

Interplay

Clause 111 expressly references section 108 in its definition of "unabsorbed capital loss," indicating an intended sequencing relationship: first apply set-off provisions of section 108 within the year, then determine the residual unabsorbed amount for carry forward under Clause 111. Other Rules, Notifications, or Circulars that might affect computation, forms, or procedural aspects are Not stated in the document. Interaction with provisions dealing with aggregation of assets, clubbing, or transferor-transferee adjustments is Not stated in the document.

Differences Between the Clause 111 of the Income Tax Bill, 2025 - Old Version and Section 111 of the Income-tax Act, 2025

• Practical impact - Terminology: The Bill's explicit definition of "unabsorbed capital loss" clarifies the point at which carry forward applies (i.e., after set-off u/s 108); the enacted Section omits the defined label but retains the practical concept. This definitional clarity reduces potential ambiguity in assessing whether a loss is eligible for carry forward.

• Practical impact - Substance: The substantive set-off rules are materially the same (short-term losses can be set off against any capital gains; long-term losses only against long-term gains) and both limit carry forward to eight years. Therefore, practical tax outcomes for most taxpayers remain unchanged.

• Practical impact - Drafting/interpretation risk: Differences are largely drafting and labelling; however, the Bill's cross-reference to section 108 may aid interpretive disputes over the sequencing of set-off, whereas the enacted Section's omission of that explicit reference could lead to argument on whether set-off u/s 108 is a precondition - though the enacted section's language implies the same sequencing. Litigation risk is modest but present.

Practical Implications

• Compliance and risk areas: Taxpayers should ensure correct classification of capital assets as long-term or short-term for set-off eligibility; failure to apply subsection (2) accurately may lead to disallowance of set-off and demands. The Bill's defined term reduces risk of disagreement on when a loss becomes eligible for carry forward by linking it to non-absorption u/s 108.
• Record-keeping/evidence: Retain computation records demonstrating (i) application of section 108 in the year of loss, (ii) segregation of long-term vs short-term losses, (iii) subsequent-year capital gains computations showing set off, and (iv) chronology evidencing the eight-year carry-forward timeline. Specific documentary requirements or forms are Not stated in the document.

Key Takeaways

• Both texts enact a carry-forward regime for capital losses with an eight-year temporal limit; substantive outcomes for taxpayers are largely consistent across versions.
• The Bill (old version) adds a specific defined term "unabsorbed capital loss" and links it to non-absorption u/s 108, clarifying the sequencing for set-off and carry forward.
• Long-term capital losses can only be set off against long-term capital gains; short-term losses can be set off against gains from any capital asset.
• No exceptions, special cases, or procedural mechanics (forms, rates, or effective date) are specified in either text; such matters are Not stated in the document.
• Practical compliance relies on accurate classification of assets, documentation of intra-year set off u/s 108, and monitoring of the eight-year carry-forward window.

Full Text:

Section 111 Carry forward and set off of loss from Capital gains.