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Incomes exempt from tax, Chapter VIII deductions, and set off and carry forward of losses

Law of Taxation · Unit II · Topic 11 of 20 · 7 min read

How the Income-tax Act, 2025 moves exemptions into Schedules II to VII, the main exempt incomes, the deductions from gross total income in Chapter VIII (formerly Chapter VI-A), the new-regime restrictions, the rebate, and the rules on setting off and carrying forward losses.

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  1. 1. Exempt incomes: section 11 and the Schedules [section 10]
  2. 2. Chapter VIII deductions: general rules [Chapter VI-A]
  3. 3. Deductions for payments (Part B)
  4. 4. Deductions for incomes (Parts C to E)
  5. 5. Set off and carry forward of losses: Chapter VII [Chapter VI]
  6. 6. Problem
  7. How this is examined
Cases checked to exist. Read the judgment before quoting a holding.

Every case cited here has been checked to exist — the citation resolves and names the right parties. The propositions attributed to each case have not been verified line by line against the judgment. Case names link through to the full judgment: read it before quoting a holding in an examination answer, and never carry a proposition from notes into court on trust.

The examinable core. Keep three stages apart. An exempt income never enters total income. A deduction under Chapter VIII is taken off gross total income after the five heads are added up. A rebate is taken off the tax. Set-off of losses happens before Chapter VIII deductions. Most errors in this topic come from mixing the stages.

1. Exempt incomes: section 11 and the Schedules [section 10]

Under the 1961 Act, section 10 had grown to more than fifty clauses. The Income-tax Act, 2025 replaces it with section 11, which says that income enumerated in Schedules II to VI shall not be included in total income, subject to the conditions in those Schedules, and that the persons enumerated in Schedule VII are not chargeable at all (section 11(1) and (3)). If the conditions fail in any year, the income becomes taxable (section 11(2) and (4)).

Expenditure incurred in relation to exempt income is not deductible (section 14 [section 14A]), and the Assessing Officer may compute it by the prescribed method if he is not satisfied with the assessee’s claim.

2. Chapter VIII deductions: general rules [Chapter VI-A]

Section 122 [sections 80A to 80AC]: deductions are allowed from gross total income; their total cannot exceed gross total income; a deduction under one section cannot be claimed again under another for the same amount; deductions linked to certain incomes need a return filed by the due date.

3. Deductions for payments (Part B)

4. Deductions for incomes (Parts C to E)

The new regime. Section 202 is the default regime for individuals, HUFs, AOPs, BOIs and artificial juridical persons, with slabs from nil up to ₹4,00,000 to 30% above ₹24,00,000. Under section 202(2)(a)(xii) almost all of Chapter VIII is unavailable in that regime; the main survivor is the employer’s NPS contribution under section 124. An assessee who wants section 123 or 126 must opt out of the new regime in the manner provided in section 202. Rebate under section 156 [section 87A]: in the new regime, full tax up to ₹60,000 where total income does not exceed twelve lakh rupees; in the old regime, up to ₹12,500 where total income does not exceed five lakh rupees.

5. Set off and carry forward of losses: Chapter VII [Chapter VI]

Intra-head set off (section 108 [section 70]): a loss from one source can be set off against income from another source under the same head. Capital gains have their own rule: a short-term capital loss may be set off against any capital gain, a long-term capital loss only against long-term gain.

Inter-head set off (section 109 [section 71]): a loss under one head (other than capital gains) can be set off against income under any other head in the same year, except that (a) a business loss cannot be set off against salary, and (b) a house property loss can be set off against other heads only up to ₹2,00,000. A capital loss cannot be set off against any other head.

Carry forward.

Losses cannot be carried forward unless determined on a return filed within the due date under section 263(1) (section 121 [section 80]); house property loss and unabsorbed depreciation are the exceptions. Special rules govern change in shareholding of closely held companies and change in constitution of firms (section 119 [sections 78 and 79]); no loss may be set off against undisclosed income found in a search or survey (section 120 [section 79A]); and amalgamations (sections 116 to 118 [sections 72A and 72AA]).

6. Problem

For the tax year 2026–27, Y (old regime) has salary ₹8,00,000 (after standard deduction), loss from let-out house property ₹2,60,000, business loss ₹1,00,000 and long-term capital loss ₹50,000. He invests ₹1,50,000 in PPF. Compute total income.

Law. Section 109: house property loss against salary only up to ₹2,00,000; business loss not against salary; capital loss not against any other head. Sections 110 to 112: carry forward. Section 123: deduction up to ₹1,50,000 from gross total income.

Application. Salary ₹8,00,000 less house property loss ₹2,00,000 = ₹6,00,000 gross total income. Carry forward ₹60,000 house property loss (section 110), ₹1,00,000 business loss (section 112), ₹50,000 long-term capital loss (section 111). Less section 123 deduction ₹1,50,000.

Conclusion. Total income = ₹4,50,000; three losses are carried forward, provided the return is filed by the due date.

How this is examined

February 2025 Q. 2(b): short note on income exempt from tax. The syllabus also names “set off and carry forward loss” and “permissible deductions and Chapter VIA deductions”, which come as essays or short notes. Mention that Chapter VI-A is now Chapter VIII of the 2025 Act, and that section 10 exemptions are now in the Schedules.

Now try the real questions: Law of Taxation past question papers.