Inter-head adjustment

Once a taxpayer has used a loss against everything available under the same head, there may still be loss left over and income sitting under a different head. Inter-head adjustment is the permission to move across.

The permission is real but narrow, and the workbook fences it with three conditions. One is about sequence: the intra-head adjustment must be done first. The other two are outright bars, and both are examinable more often than the permission itself.

Section 109 of the ITA allows a taxpayer — an AIF included — who has a loss under one head and income under another to set the first against the second, subject to:

The capital gains bar is the one that matters for this paper. It runs in one direction only: a capital loss cannot go out to other heads, but a business loss can come in against capital gains. Read the restriction as written — it protects the other heads from capital losses, not capital gains from other losses.

What is left unabsorbed after both steps is carried forward. For capital losses that is section 111: only against capital gains in later years, long-term against long-term only, for 8 years.

The AIF overlay is section 224. An Investment Fund is a pass-through for income other than business income, so the capital gains and the losses on them are computed in the investors' hands; business loss at fund level is not passed through and is carried forward at the fund.

A resident individual invests in a Category I AIF and, in the same tax year, runs a consultancy. For the year:

Step 1 — intra-head. Nothing to do; there is one source under each head.

Step 2 — inter-head under section 109. The consultancy loss cannot go against salary; that bar is absolute. It can go against the other heads:

Business loss 18,00,000
  against interest income  6,00,000  → 12,00,000 remaining
  against LTCG            12,00,000  → nil

Now run the same numbers with the signs reversed on the last two lines — a capital loss of Rs 31 lakh and business income of Rs 18 lakh. Not one rupee of that capital loss can be set against the business income, the interest or the salary. All Rs 31 lakh is carried forward under section 111, usable only against future capital gains, for 8 years.

Same taxpayer, same arithmetic magnitude, and an entirely different tax bill — because of which head the loss sat under.

Chapter 13 (Taxation), section 13.2, "Inter Head adjustment of loss (section 109 of ITA)". The dependable questions are the two bars: a capital loss cannot be set against any other head, and a business loss cannot be set against salary. Expect them as true/false or as a computation where the distractor answer offsets the capital loss against business income.

• Intra-head before inter-head. The workbook makes the sequence a condition, not a suggestion.
• The capital gains bar runs outwards only. A loss under "Capital gains" cannot leave the head. A business loss can still be set against capital gains.
• Business loss can never touch salary. That bar has no exceptions in the workbook's treatment.
• Use the 2025 Act numbering this workbook uses: 108 intra-head, 109 inter-head, 111 carry-forward of capital loss.
• Carried-forward capital loss is not freed up by the passage of time. In later years it is still only available against capital gains, for 8 years.
• For an AIF, remember which losses even reach the investor. Pass-through under section 224 covers income other than business income; fund-level business loss stays at the fund.