Carry-Forward of Losses After 1 April 2026: Income-tax Act 2025 vs 1961

Direct answer: A valid loss arising under the Income-tax Act, 1961 does not disappear merely because that Act was repealed from 1 April 2026. The Income-tax Act, 2025 contains an express transition in section 536 that preserves eligible pre-commencement losses and allows them to be carried forward and set off under the new Act in the corresponding manner. The important caution is equally clear: repeal does not restart the carry-forward clock, change the nature of the loss, or revive a loss that had already become ineligible under the old law.

Why the transition matters

The Income-tax Act, 1961 governed income up to the transition into the new framework, while the Income-tax Act, 2025 took effect from 1 April 2026. That creates a practical question for taxpayers with accumulated business losses, capital losses, house-property losses or other carried-forward amounts: which law governs their use after the switch? Section 536 is the bridge. It preserves rights and liabilities created under the repealed Act instead of treating 1 April 2026 as a clean slate.

This is a material transition issue, but it should not be misdescribed as a fresh tax concession. The new Act does not generally give old losses a new life or a new eight-year period. It protects an existing eligible loss so that it can continue through the remaining period and subject to the conditions that applied to it.

Old law — Income-tax Act, 1961

Under the 1961 Act, different provisions governed different loss categories. For example, section 71B dealt with carry-forward of house-property loss, section 72 with business loss, and section 74 with capital loss. Section 80, read with the return-filing provisions including section 139(3), imposed an important procedural condition for specified losses: a taxpayer generally had to furnish the loss return within the applicable statutory framework in order to preserve the right to carry that loss forward.

The old law also preserved the character of losses. A business loss did not become a capital loss merely because it moved into a later year, and the familiar restrictions on the manner of set-off continued to apply. The same principle becomes crucial at transition because the new Act does not erase that history.

New law — Income-tax Act, 2025

For the transition itself, section 536 is central. The Income Tax Department’s official FAQs explain that losses computed under the 1961 Act can continue to be carried forward under the 2025 Act. The preserved loss is carried forward and set off in the manner corresponding to the old provision, subject to the balance of the original eligibility period and the conditions attached to that loss.

For losses arising under the new Act, section 121 continues the timely-return principle for specified losses. In other words, the move to the 2025 Act does not convert loss carry-forward into an unconditional entitlement. Filing discipline remains relevant. The Department has also clarified that the restriction on setting off losses against specified undisclosed income continues in substance under the new framework, with section 120 corresponding to the earlier section 79A rule.

What actually changed

First, the statute governing future use changes. A loss may have been computed under the 1961 Act, but its later utilisation can occur during a tax year governed by the 2025 Act. Tax computations, tax software and working papers therefore need to retain the origin-year history while also applying the new statutory framework to the current year.

Second, section 536 provides an express continuity mechanism. This matters because without a savings-and-transition rule, repeal could create uncertainty over accrued rights and pending tax attributes. The new Act instead preserves eligible losses and allows them to travel into the new regime.

Third, section references and return terminology change. A professional preparing a Tax Year 2026-27 computation should not casually rewrite the history of an old loss as though it arose under the 2025 Act. The source-year record should show that the loss originated under the repealed Act and is being carried forward through the transition provision.

What did NOT change

The carry-forward period does not restart on 1 April 2026. The Income Tax Department gives the example of an eligible business loss originating in an earlier assessment year and confirms that the original eight-year period continues to run; the transition to the new Act does not grant a fresh eight years.

The nature of the loss does not get reclassified. An old business loss remains a business loss, an old capital loss remains a capital loss, and the corresponding set-off restrictions continue to matter. Likewise, a loss that was not validly available for carry-forward under the 1961 Act is not automatically cured merely because the 2025 Act has commenced.

The new Act therefore preserves continuity rather than creating a windfall. The practical exercise is to identify what was validly available immediately before transition and then carry only that eligible balance into the new framework.

FY 2025-26 / AY 2026-27 is a key edge case

The transition is especially important for a loss relating to FY 2025-26 / AY 2026-27. The return for that period remains governed by the 1961 Act even if the filing activity happens after 1 April 2026. Once the loss is validly determined and eligible for carry-forward, the Department’s FAQs confirm that it can move into Tax Year 2026-27 and later years under the 2025 Act, subject to the applicable conditions.

This means professionals should not confuse the calendar date on which an old-year return is filed with the statute governing that return. The underlying year and the transition provisions determine the treatment.

Worked example

Assume a company validly reported a business loss of ₹24 lakh for an earlier year under the Income-tax Act, 1961 and satisfied the applicable return-filing requirements. Before 1 April 2026, ₹6 lakh of that loss was absorbed, leaving ₹18 lakh eligible for carry-forward. In Tax Year 2026-27, the company earns ₹10 lakh of eligible business income.

Subject to the applicable set-off rules, the preserved old business loss can be used against that business income. If ₹10 lakh is set off, ₹8 lakh remains. What does not happen is a reset of the original carry-forward period on 1 April 2026. The remaining ₹8 lakh can travel only through the balance of the period that was available to the original loss.

Why a belated old loss does not get revived

Suppose instead that a taxpayer incurred a business or capital loss under the 1961 Act but failed the return-filing condition that was necessary to carry it forward. The commencement of the 2025 Act does not create a second opportunity to revive that expired or ineligible loss. Section 536 preserves an existing eligible tax attribute; it does not manufacture a right that did not survive under the old law.

Practical checklist for businesses and tax teams

Maintain a year-wise loss register that records the nature of each loss, the year of origin, the amount originally determined, amounts already absorbed, the current balance and the last eligible year under the original rule. Do not allow tax software to treat 1 April 2026 as a new origin date.

Retain the acknowledgements, computation schedules, assessment or appellate orders and other records supporting the quantum of the carried-forward loss. Where an assessment or appeal later changes the amount, update the transition schedule rather than merely carrying the return figure forward.

Check the timely-return condition separately for business and capital losses and other categories to which it applies. Also segregate items such as unabsorbed depreciation from ordinary business losses because their statutory treatment can differ.

For FY 2025-26 / AY 2026-27, clearly document that the return is an old-Act return even though the 2025 Act is already in force by the filing date. Then map the valid closing loss balance into the new-Act computation for Tax Year 2026-27 onward.

Frequently asked questions

Can a valid AY 2026-27 loss be carried into Tax Year 2026-27? Yes, subject to the applicable old-law conditions and the transition protection in section 536.

Does 1 April 2026 restart the eight-year period for an old business or capital loss? No. The original carry-forward period continues; it does not reset because of repeal.

Can a loss that was ineligible because the old return condition was not met become eligible under the new Act? No. The transition provision preserves eligible rights; it does not revive a right that had already failed under the 1961 Act.

Does an old loss change its character after transition? No. The Department’s guidance makes clear that old losses continue in their corresponding category and are set off subject to the applicable restrictions.

Related PGT & Associates analysis

For the connected return-filing transition, see: https://www.pgtandassociates.com/post/section-139-vs-section-263-income-tax-return-filing-2025-act

Primary sources

Income Tax Department — Set off / Carry forward of Losses FAQs: https://www.incometax.gov.in/iec/foportal/help/all-topics/e-filing-services/set%20off/carry%20forward%20of%20losses%20-faq

Income Tax Department — Income Tax Return FAQs under the new Act: https://www.incometax.gov.in/iec/foportal/help/all-topics/e-filing-services/income-tax-returns

Income Tax Department — Objective and Scope of the New Act FAQs: https://www.incometax.gov.in/iec/foportal/help/all-topics/e-filing-services/objective-and-scope-new-act-faq

Professional note

Businesses carrying material historical losses into the 2025 Act should reconcile the year-wise balance before using it in a new-law computation. The transition is designed to preserve valid rights, but the source year, filing condition, nature of loss and remaining eligibility period remain critical.

Disclaimer: This article is for general professional information and does not constitute legal or tax advice. The applicable facts, return history, assessment orders and current statutory provisions should be reviewed before taking a position in a specific case.