Intra-head adjustment

Income tax sorts everything a taxpayer earns into heads — salaries, house property, business or profession, capital gains, other sources. Losses have to be dealt with inside those boxes before anything else can happen.

Intra-head adjustment is the inside-the-box step. If a taxpayer — an AIF included — makes a loss from one source in a year, that loss is first set against income from another source falling under the same head. A loss on one portfolio exit offsets a gain on another, because both are capital gains.

Only once that is done can the taxpayer look at moving losses between heads, which is the separate inter-head step.

Section 108 of the ITA permits the set-off, subject to three restrictions the workbook lists and the exam tests:

The asymmetry between the first two rows is the whole point. A short-term loss is the flexible one; a long-term loss is trapped against long-term gains.

What cannot be absorbed this year does not vanish. Under section 111, an unadjusted loss under the head "Capital gains" is carried forward to the next tax year, where it can be set off only against capital gains — long-term loss against long-term gains only, short-term loss against either — and it may be carried forward for 8 years immediately succeeding the year of loss.

For an AIF the context is the pass-through. Under section 224 an Investment Fund enjoys pass-through status for income other than business income, so gains and losses on portfolio exits are the investors' to deal with — while any business loss at the fund level is not passed through and stays at the fund to be set off against the fund's business income in later years.

A Category II AIF has four exits and one write-off in the tax year:

Step 1 — long-term against long-term.

LTCG 82 − LTCL 47 = Rs 35 crore of net long-term gain

Step 2 — short-term loss, which may go against either.

The fund sets the Rs 28 crore short-term loss first against the Rs 19 crore of short-term gain, leaving Rs 9 crore, and then against the long-term gain:

STCL 28 − STCG 19 = Rs 9 crore remaining
Net LTCG 35 − 9   = Rs 26 crore

Net position: Rs 26 crore of long-term capital gains, nil short-term.

Now reverse the signs on the first two rows — Rs 47 crore of long-term gain and Rs 82 crore of long-term loss. The Rs 35 crore of unabsorbed long-term loss cannot touch the Rs 19 crore of short-term gain at all. It is carried forward under section 111 and waits, for up to 8 years, for a long-term gain to arrive.

Chapter 13 (Taxation), section 13.2, "Intra Head adjustment of loss (section 108 of the ITA)", with the carry-forward rules in section 111 alongside. Expect a set-off question giving you a mix of long-term and short-term gains and losses, and a true/false on whether a long-term capital loss can be set against a short-term capital gain — it cannot.

• The relief runs one way only. Short-term loss against long-term or short-term gains; long-term loss against long-term gains only. Candidates routinely reverse this.
• Intra-head comes first. Inter-head adjustment under section 109 cannot be attempted until the intra-head set-off is done — the workbook states the ordering expressly.
• Speculative business losses are ring-fenced and cannot be set against non-speculative business gains.
• Cite the 2025 Act numbering. This workbook uses section 108 for intra-head, 109 for inter-head and 111 for carry-forward of capital loss. Section numbers from the older Act belong to a different paper.
• Carry-forward of capital loss runs 8 years, and only against capital gains — it does not become available to other heads with age.
• At fund level, business loss is not passed through to investors under section 224; it is retained and set off against the fund's later business income.