Income Tax Department Clarifies Carry-Forward of Old Losses Under Income Tax Act, 2025

The Income Tax Department has published detailed guidance on how losses and certain deductions originating under the Income Tax Act, 1961 are treated after the Income Tax Act, 2025 came into force from 1 April 2026. The new FAQ set is particularly relevant for Chartered Accountants and tax teams preparing computations that straddle the old and new laws, because it confirms that eligible historical losses are generally preserved rather than reset or reclassified.

Old losses can continue, but the original conditions still matter

The Department says section 536 of the Income Tax Act, 2025, which contains the repeal and saving provisions, protects losses brought forward from tax periods beginning before 1 April 2026. Clauses 536(2)(m) and 536(2)(n) preserve the ability to carry those losses forward and set them off in the manner permitted under the corresponding provisions of the repealed 1961 Act.

That preservation does not create a fresh carry-forward period. The Department gives the example of an eligible business loss from AY 2023-24: it may continue into the new-law period, but the original eight-year limit continues to run from AY 2023-24. In other words, the statutory transition does not restart the clock.

Nature of the loss remains unchanged

The FAQs also clarify that old losses retain their original character. Business losses remain business losses, speculation losses retain their separate character, and capital losses remain capital losses. The Income Tax Act, 2025 does not automatically convert historical losses into new heads merely because the governing statute has changed.

For house-property losses arising before 1 April 2026, the Department states that carry-forward and set-off continue in the manner provided by section 71B of the old Act. Likewise, brought-forward business losses continue to be restricted to business income as under section 72 of the 1961 Act, subject to the original conditions. Long-term and short-term capital losses can also continue to be used against capital gains according to the old-law set-off rules applicable to those losses.

A defective old loss return is not cured by the new Act

A significant practical clarification concerns belated returns. If a loss return for AY 2024-25 was filed late and did not satisfy section 139(3) read with section 80 of the Income Tax Act, 1961, the loss does not become eligible for carry-forward merely because the new Act is now in force. The Department says section 536 preserves validly determined rights; it does not revive a loss that had already failed the statutory conditions under the old law.

Pending proceedings for old years continue under the 1961 Act

The transition guidance draws a clear line around disputes and proceedings relating to tax years beginning before 1 April 2026. Appeals, reassessments, rectification, revision and penalty proceedings for those years continue under the Income Tax Act, 1961 by virtue of section 536. This means that an appellate authority deciding an old-year deduction dispute after repeal still applies the old statutory framework to that dispute.

However, the outcome may feed into computations under the new law. The Department illustrates that if an appellate decision for a pre-2026 year changes the quantum of a loss, unabsorbed depreciation or another carried-forward amount, its future utilisation from Tax Year 2026-27 onward operates within the Income Tax Act, 2025 framework.

Grandfathered deductions can continue, but new-law computation can affect the base

The FAQs also address deductions that were validly available under the 1961 Act and continue beyond 1 April 2026. Where the 2025 Act contains a specific transitional provision, the remaining deduction period can continue subject to the original eligibility conditions. Yet for tax years under the new Act, business income itself is computed under the 2025 law.

The Department's example is instructive: if an undertaking has a continuing old-law deduction but its business profit under the new computation rules is lower than it would have been under the 1961 Act, the deduction applies to the profit computed under the new Act. The historical eligibility may be preserved, but the current-year computation base follows the current law.

What CAs and tax teams should check now

- Map every brought-forward loss to its original assessment year, head of income and remaining statutory life.

- Confirm that the original return and carry-forward conditions were validly satisfied; the 2025 Act does not repair old defects.

- Keep old-year litigation and rectification work under the 1961 Act where section 536 preserves that framework.

- Separately assess how the result of an old-year dispute affects Tax Year 2026-27 and later computations under the 2025 Act.

- For grandfathered deductions, distinguish between preserved eligibility and the profit base computed under the new law.

The Department's position is continuity with conditions, not a reset. Valid losses and eligible deductions from the old regime can survive into the Income Tax Act, 2025, but they retain their original character, limits and defects. For professional advisers, the critical task is therefore to maintain a clean transition schedule linking each carried-forward item to its old-law origin and its new-law utilisation.

Useful official links

Set off/Carry forward of Losses FAQs

Key takeaway

The Income Tax Department has refreshed detailed official FAQs on a high-friction transition issue affecting return preparation, tax computations, pending proceedings and advisory work for Tax Year 2026-27 onward.