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Section 70 — Set-off of Loss from One Source against Another (Same Head)

Think of Section 70 as the "same-floor rule" for losses. If you're losing money from one room on the same floor, you can use that loss to cover income earned in another room on the same floor. The "floor" here is the head of income — Salary, House Property, Business/Profession, Capital Gains, or Other Sources.

The General Rule (Sub-section 1): For all heads except Capital Gains, if one source gives you a loss and another source under the same head gives you income, you can net them off within that head. Classic example: Mr. Sharma owns two house properties. House A earns a Net Annual Value of ₹1,20,000 but House B has a loss of ₹80,000 (interest on loan exceeds income). Under Section 70, the ₹80,000 loss from House B is set off against the ₹1,20,000 income from House A — he pays tax only on ₹40,000. Simple, clean, same floor.

The Capital Gains Exception — and it matters in exams: Capital Gains gets its own special sub-rules because the Act separates Short-Term Capital Gain (STCG) and Long-Term Capital Gain (LTCG) due to different tax rates.

  • Sub-section (2): A Short-Term Capital Loss (STCL) is flexible — it can be set off against both STCG and LTCG. STCL is the good sport of the capital gains room.
  • Sub-section (3): A Long-Term Capital Loss (LTCL) is stubborn — it can only be set off against LTCG, not against STCG. This is because LTCG gets preferential tax treatment, so the Act won't let an LTCL wipe out STCG taxed at a higher rate.

What Section 70 does NOT allow: You cannot use a loss from one head to reduce income from a different head at this stage — that's the job of Section 71 (inter-head set-off). Also, speculative business losses (e.g., intraday equity trading losses) cannot be set off against regular business profits even though both sit under the same head — that restriction comes from Section 73. Section 70 itself is the baseline rule; other sections carve out exceptions.

This section is frequently tested as a 4-mark numerical — often combined with Section 71 in a single problem. Nail the STCL vs. LTCL rule and you're set.

📊 Worked example

Example 1 — House Property (Sub-section 1)

Ms. Iyer owns two let-out properties in FY 2025-26:

| Property | Income / (Loss) |

|---|---|

| House 1 (Chennai) | ₹1,80,000 |

| House 2 (Pune) | (₹75,000) |

Working:

Income from House 1 = ₹1,80,000

Less: Loss from House 2 set off u/s 70 = (₹75,000)

Net Income under Head: House Property = ₹1,05,000

Both sources are under the same head, so Section 70(1) applies directly. No restrictions here.

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Example 2 — Capital Gains (Sub-sections 2 & 3)

Rajesh & Co. Pvt. Ltd. has the following capital gains/losses in FY 2025-26:

| Transaction | Amount |

|---|---|

| STCG on sale of listed shares | ₹2,50,000 |

| LTCG on sale of land | ₹3,00,000 |

| STCL on sale of debt mutual funds | (₹1,20,000) |

| LTCL on sale of unlisted shares | (₹90,000) |

Working:

Step 1 — Set off STCL of ₹1,20,000 u/s 70(2):

STCL can be set off against STCG first, then LTCG.

Set off against STCG: ₹2,50,000 − ₹1,20,000 = ₹1,30,000 (STCG remaining)

STCL fully absorbed; nothing left to set off against LTCG.

Step 2 — Set off LTCL of ₹90,000 u/s 70(3):

LTCL can only be set off against LTCG.

Set off against LTCG: ₹3,00,000 − ₹90,000 = ₹2,10,000 (LTCG remaining)

Final taxable Capital Gains:

STCG = ₹1,30,000 | LTCG = ₹2,10,000

Note: Had LTCL been ₹3,50,000, the unabsorbed ₹50,000 would carry forward u/s 74 — only against future LTCG.

⚠️ Common exam mistakes

  • Students try to set off losses across heads at Section 70 itself. Section 70 is strictly intra-head (same head only). Cross-head set-off (e.g., house property loss against salary) happens only at the Section 71 stage. Keep these two sections in separate mental boxes.
  • Students assume LTCL can be set off against STCG. It cannot — Section 70(3) is explicit. Only STCL gets that flexibility under Section 70(2). Confusing the two directions is a guaranteed mark-killer.
  • Students forget the speculative business loss restriction. Even though speculative losses sit under "Business/Profession," they cannot be set off against non-speculative business income at this stage. Don't blindly apply Section 70(1) without checking Section 73 restrictions.
  • Students set off house property loss here without checking the ₹2,00,000 cap. Section 70(1) allows intra-head set-off of HP losses freely, but when you move to Section 71, the inter-head HP loss set-off is capped at ₹2,00,000 per year. The ₹2,00,000 cap does NOT restrict Section 70 — only Section 71. Don't import the cap into the wrong section.
  • In problems with both STCL and LTCL, students don't sequence the set-off correctly. Always set off STCL first (it's more flexible), then LTCL. Reversing the order can produce a different (wrong) answer in carry-forward questions.
📖 Bare Act text — Section 70, Income Tax Act 1961 (click to expand)
(1) Save as otherwise provided in this Act, where the net result for any assessment year in respect of any source falling under any head of income, other than "Capital gains", is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head. (2) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any short-term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset. (3) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any capital asset (other than a short-term capital asset) is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset not being a short-term capital asset.
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