Inter-source Adjustment: Offsetting Losses Within the Same Income Head

Say you own two flats. One is rented out and generates a healthy surplus after deducting municipal tax and standard deduction. The other, financed through a home loan, is sitting vacant and running at a loss because the interest outgo is higher than the notional rent. Do you pay tax on the profitable flat as if the loss on the other one doesn’t exist? Thankfully, no. The Income Tax Act lets you net these two results against each other before working out your tax liability, and this is exactly what inter-source adjustment does.

This is one of the first concepts B.Com students meet in the chapter on set-off and carry forward of losses, and it’s also one of the most practical, since almost every taxpayer with more than one source of rental income, business income, or capital gains will use it at some point.

What inter-source adjustment actually means 🔗

Inter-source adjustment, also called intra-head adjustment, allows a loss from one source of income to be set off against income from another source falling under the same head of income. The five heads are salary, house property, profits and gains of business or profession, capital gains, and income from other sources. If you have a loss in one source and a profit in another source under the same head, the two are netted out in the same tax year before you move to any other tax-saving step.

This rule has been carried forward almost word for word into current law. Since 1 April 2026, the Income-tax Act, 2025 has replaced the Income-tax Act, 1961, and provisions that once sat under sections 70 to 80 of the old law have been renumbered and grouped more sequentially, with intra-head adjustment now placed under Section 80 of the 2025 Act, corresponding to the old Section 70. If your textbook or a reference material still calls this “Section 70,” that’s simply because most B.Com material was written under the 1961 Act framework; the underlying rule is unchanged.

The other terminology shift worth knowing is that the twin concepts of “previous year” and “assessment year” have been merged into a single “tax year” under the new Act, so computations that once spanned a previous year and its following assessment year are now referenced to one tax year.

The basic rule: netting results within a head 🔗

The mechanics are straightforward. If the net result from any source under a head of income is a loss, that loss can be adjusted against income from any other source under the same head, for the same tax year. Two everyday examples make this concrete.

Example: two house properties 🔗

Here, the loss from flat B is absorbed entirely against the income from flat A within the same head, and only the net figure of ₹1,40,000 flows into gross total income. No approval, cap, or special condition applies to this kind of adjustment because both sources sit under the same head.

Example: two business activities 🔗

The same logic applies to business income. If a taxpayer runs a retail store that earns a profit of ₹5,00,000 and a consulting practice that reports a loss of ₹1,20,000, the loss reduces the taxable business income to ₹3,80,000, provided both are treated as regular business income and none of the exceptions discussed below apply.

Why the order matters 🔗

Set-off provisions in Indian tax law follow a strict sequence: intra-head adjustment happens first, inter-head adjustment happens next if a loss still remains, and whatever cannot be absorbed is carried forward to later years. This hierarchy is preserved without material change under the new Act, and the tax department’s own transition FAQs confirm that losses computed under the old Act continue to be carried forward and set off in the same manner under the new one. Getting the sequence right matters because some exceptions apply only at the inter-source stage, and missing them can lead to an incorrect return.

Exceptions: losses that cannot be freely adjusted 🔗

Inter-source adjustment is generous, but it isn’t unlimited. A handful of losses are ring-fenced and can only be set off against income of a similar nature, even within the same head. These restrictions exist mainly to stop taxpayers from using losses in high-risk or specialised activities to shelter income from ordinary, low-risk sources.

Short-term capital losses, on the other hand, are more flexible. A short-term capital loss can be set off against both short-term and long-term capital gains, which is why students often get this rule mixed up with the long-term capital loss restriction above. Keeping the direction of the rule clear – long-term loss is restricted, short-term loss is not – is a common exam trap.

Why exempt income is off-limits 🔗

If a taxpayer earns exempt agricultural income alongside a taxable business loss, the loss cannot be used to offset the exempt portion, because doing so would effectively make otherwise-exempt income reduce a taxpayer’s overall liability twice over. The law treats exempt and taxable income as separate compartments precisely to prevent this kind of leakage.

Inter-source adjustment versus inter-head adjustment 🔗

It helps to see where inter-source adjustment ends and the next provision begins. Inter-source adjustment works within one head of income. Once the net result of an entire head is still a loss, the taxpayer moves to inter-head adjustment, where that loss can be set off against income under a different head altogether – for instance, a house property loss reducing salary income.

This next step comes with its own limits. Under the old regime option, a house property loss can be set off against other heads such as salary only up to ₹2 lakh in a financial year, with the remainder carried forward. Business losses, meanwhile, generally cannot be set off against salary income at the inter-head stage at all. These are separate rules from inter-source adjustment, but understanding the boundary between the two helps in following the logical flow of the chapter as it’s usually taught: intra-head first, inter-head second.

A worked example that ties it together 🔗

Consider a taxpayer with the following results in one tax year:

Here, the house property loss of ₹90,000 is fully absorbed against the house property income, leaving a net of ₹1,60,000 under that head. The speculative loss of ₹60,000, however, cannot touch the retail business profit, because speculative losses can only be adjusted against speculative gains. Since there’s no other speculative income this year, that ₹60,000 has to be carried forward instead, subject to the conditions for carrying forward speculation losses. The retail business income of ₹4,00,000 stays untouched.

Why this rule matters for tax planning 🔗

Beyond the exam room, inter-source adjustment is one of the more accessible legitimate ways for a taxpayer to lower their tax outgo. It rewards taxpayers for reporting genuine business or property losses instead of hiding underperforming assets, and it recognises that income within a single head is really one economic activity looked at from different angles. For students preparing to work in tax practice, mastering the exceptions is often more important than knowing the basic rule, since real client situations almost always involve at least one restricted category, whether it’s a client dabbling in futures and options or someone with rental losses on a second home.

Timely and accurate return filing also matters here. Losses that aren’t reported correctly in the year they arise can lose their eligibility for adjustment or carry forward altogether, so the compliance side of this topic is just as important as the computational side.

What do you think? If a taxpayer has both a long-term and a short-term capital loss in the same year, along with a mix of short-term and long-term gains, how would you sequence the set-off to get the most tax-efficient result? And why do you think the law treats speculative business losses so differently from ordinary business losses, even though both arise from the same head of income?

References

1. https://tax2win.in/guide/income-tax-act-2025-section-mapping-old-vs-new
2. https://upstox.com/news/personal-finance/tax/carry-forward-of-losses-under-the-new-income-tax-act-2025-what-investors-and-taxpayers-should-know/article-191651/
3. https://www.incometax.gov.in/iec/foportal/help/all-topics/e-filing-services/set-offcarry-forward-losses
4. https://www.incometaxindia.gov.in/w/section-73-61
5. https://cleartax.in/s/set-off-carry-forward-losses