The Income Tax Act, 2025 took effect on 1 April 2026, replacing the 60-year-old Income Tax Act, 1961. For taxpayers with brought-forward losses - business losses, capital losses, speculative losses, house property losses, or unabsorbed depreciation - the critical question is: do these losses survive the transition? The answer is yes, but with specific rules that every taxpayer and practitioner must understand.
This guide provides the definitive loss-by-loss transition framework under Section 536, the CBDT's official position, the dropped LTCL relaxation, and practical examples.
The Legal Framework: Section 536 of ITA 2025
Section 536 is the "Repeal and Savings" clause. It repeals the 1961 Act while preserving rights and ongoing matters:
Section 536(2)(m): Losses brought forward from pre-2026 years continue to be carried forward and set off under the new Act in the manner provided under the corresponding provisions of the repealed Act.
Section 536(2)(n): Capital losses from pre-2026 years shall be set off against "Capital Gains" under the new Act - in the manner provided under old Section 74.
Key principle: Old Act rules determine how losses set off. New Act provides the framework. Losses retain original character. For income tax return filing across both Acts, understanding this bridge is essential.
Loss-by-Loss Transition Table
| Pre-2026 Loss Type | Old Sec | New Sec | 536 Clause | Set-Off Rule Under New Act | Time Limit |
|---|---|---|---|---|---|
| Non-speculative business | 72 | 112 | 536(2)(m) | Business income only (old Sec 72) | Original 8 years - no restart |
| Speculative business | 73 | 113 | 536(2)(m) | Speculative income only (old Sec 73) | Original 4 years - no restart |
| STCL | 74 | 111 | 536(2)(n) | STCG + LTCG (old Sec 74) | Original 8 years |
| LTCL | 74 | 111 | 536(2)(n) | LTCG only (old Sec 74 - NOT STCG) | Original 8 years |
| HP loss | 71B | 110 | 536(2)(m) | HP income only (old Sec 71B) | Original 8 years |
| Unabsorbed depreciation | 32(2) | 33(11) | Deemed current yr | Any head except salary | Unlimited - indefinite |
| Specified business (35AD) | 73A | 114 | 536(2)(m) | Specified biz income only | Unlimited |
Professional tax planning services can map each loss to its new Act equivalent and verify remaining years.
The 8-Year Clock Does NOT Restart
| Loss Year | Max Carry Forward AY (Old) | Remaining Under New Act | Expires By |
|---|---|---|---|
| AY 2020-21 | AY 2028-29 | 2 more years | 31 March 2029 |
| AY 2022-23 | AY 2030-31 | 4 more years | 31 March 2031 |
| AY 2024-25 | AY 2032-33 | 6 more years | 31 March 2033 |
| AY 2025-26 | AY 2033-34 | 7 more years | 31 March 2034 |
| AY 2026-27 | AY 2034-35 | Full 8 years | 31 March 2035 |
For business losses, refer to ITR for business for correct carry forward reporting in new ITR forms.
CRITICAL: The LTCL-STCG Relaxation Was Dropped
Proposed: Original Bill Clause 536(n) did not mandate adherence to old Section 74 manner - creating interpretation that LTCL could set off against STCG.
Final Act: Expressly added "in the manner provided under Section 74 of the repealed Act." LTCL from pre-2026 only against LTCG. Relaxation removed. Do not plan based on the dropped provision. For capital losses, refer to ITR for capital gains.
Unabsorbed Depreciation: Smoothest Transition
- Deemed part of Section 33(11) of ITA 2025 from Tax Year 2026-27
- Retains "deemed current year" character - any head except salary
- Indefinite carry forward continues
- No due date filing condition survives
- Section 72A amalgamation violations after April 2026: amount deemed income under Section 536(2)(o)
Pre-2026 Belated Loss Returns
If loss return for AY 2024-25 was filed belatedly and did NOT meet Section 139(3)/Section 80 - loss cannot be carried forward. Old Act governs eligibility. New Act does not grant fresh rights. Exception: HP loss and depreciation from belated returns CAN carry forward.
How Both Acts Run in Parallel
| Scenario | Which Act | Key Implication |
|---|---|---|
| FY 2025-26 ITR filing | ITA 1961 | Old sections, old forms |
| Assessment for pre-2026 years | ITA 1961 | Continues as if new Act not enacted |
| Pending appeals for prior years | ITA 1961 | CIT(A), ITAT, HC, SC under old Act |
| BF losses INTO Tax Year 2026-27 | Old rules, new framework | Sec 536 bridge - old manner, new platform |
| New losses in Tax Year 2026-27 | ITA 2025 | Sections 108-115 |
| ITR filing for TY 2026-27 | ITA 2025 | New sections, new forms |
| Sec 72A violation after April 2026 | ITA 2025 Sec 536(2)(o) | Amount set off = deemed income |
Practitioner Checklist
- Inventory all BF losses by type and origin year - compute remaining carry forward years
- Verify each loss from due-date-filed return (Sec 139(1)/139(3)) - belated = only HP/depreciation survive
- Map each loss type to new Act section for Tax Year 2026-27 ITR
- Update Schedule CFL with correct year references and new section numbers
- Do NOT assume LTCL can set off against STCG - dropped relaxation
- Verify depreciation transition to Section 33(11) in new Schedule BP
Ensure TDS return filing for Tax Year 2026-27 uses new Section 393 while pre-2026 uses old TDS sections.
Worked Examples
Example 1: Business Loss - Clock Continues
M/s ABC - AY 2022-23: F&O loss Rs 8L (filed on time). Rs 3L set off in AY 2023-24. Balance Rs 5L.
Transition: Rs 5L carries into Tax Year 2026-27 under Sec 536(2)(m). Business income only. Expires AY 2030-31 (4 more years). Clock did NOT restart.
Example 2: LTCL - No Relaxation
Mr. Raj - AY 2024-25: LTCL Rs 6L. TY 2026-27: STCG Rs 4L + LTCG Rs 2L.
Set-off: LTCL Rs 2L against LTCG only. STCG Rs 4L fully taxable. Balance LTCL Rs 4L carried forward. Old Sec 74 rules enforced.
Example 3: HP Loss - Belated Return Safe
Mrs. Priya - AY 2025-26: HP loss Rs 1.8L (belated return). TY 2026-27: Rental income Rs 2.5L.
Set-off: Rs 1.8L HP loss against Rs 2.5L HP income. Net Rs 70K. HP loss preserved despite late filing.
Example 4: Depreciation - Indefinite Bridge
M/s XYZ - Unabsorbed depreciation Rs 12L. TY 2026-27: Business Rs 5L + LTCG Rs 3L + Salary Rs 8L.
Set-off: Rs 5L business + Rs 3L LTCG = Rs 8L absorbed. Cannot touch Rs 8L salary. Rs 4L carries forward indefinitely under Sec 33(11).
Key Takeaways
Section 536(2)(m) and (n) preserve all pre-2026 losses. They retain original character - no reclassification. Old Act rules govern set-off manner.
The 8-year/4-year clock does NOT restart. Loss from AY 2022-23 still expires AY 2030-31. Both Acts run in parallel.
The LTCL-STCG relaxation proposed in the Bill was DROPPED. LTCL only against LTCG - old Section 74 rules apply.
Belated loss returns remain disqualified (except HP and depreciation). New Act does not grant fresh carry forward rights.
Unabsorbed depreciation - deemed Section 33(11). Unlimited, any head except salary, no due date. Safest transition.
Need Help with Income Tax Return Filing?
The transition requires careful loss mapping, remaining year computation, and accurate ITR reporting under new forms.
Explore our income tax return filing and tax planning services for transition support.
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