My business made a loss. Can I set it off against my salary or rent, or carry it forward, and for how many years?

What does the law say?

Two sections of the Income Tax Ordinance, 2001 decide what happens to a business loss.

Section 56: set off in the same year. Subject to the separate rules for speculation losses in section 58 and for capital losses, a person who has a loss under one head of income may set it off against income under any other head for the same tax year, except income under the head Salary. A proviso added by the Finance Act, 2025 adds a second exception: a business loss shall not be allowed against income from property for the tax year. Section 56(3) says that where there is a business loss and a loss under another head, the business loss is set off last.

Section 57: carry forward. Whatever part of the business loss cannot be set off under section 56 is carried forward to the next tax year and set off only against income under the head Income from Business. This repeats year after year, but no loss can be carried forward to more than six tax years immediately after the year in which it was first computed. Section 57(3) says the oldest loss is used first.

Section 114: return. Section 114(1)(b)(ii) requires a return of income from a person who claims a loss carried forward under the Ordinance for a tax year.

How does it work in practice?

For a sole proprietor who also has a job or a rented property, the two heads a business loss cannot touch are exactly the ones most likely to carry income: Salary and Income from Property. Section 56 leaves the other heads, Capital Gains and Income from Other Sources, available for set-off. Some income under those heads is taxed at separate rates or as a final tax under other provisions, and how set-off works against that income is not covered on this page.

What cannot be used this year moves forward, but only against future business profit. A loss from a failed clothing shop can later be used against profit from a new catering business, because both are Income from Business. It cannot be used against a later year’s salary or rent.

Depreciation inside the loss. Section 57(4) treats the part of a loss that comes from depreciation, initial allowance and amortisation deductions differently. That part is set off against fifty percent of the balance business income in later years, or one hundred percent if taxable income for the year is less than Rs. 10 million, and continues “until completely set off”. Section 57(5) says these deductions are treated as used last. The six-year limit in section 57(2) is written for the loss generally; section 57(4) has its own “until completely set off” wording for the depreciation part.

Speculation business. Section 58 keeps speculation losses separate. They are set off only against income from another speculation business, and also carry forward for six tax years.

Worked example (illustrative figures)

Sana lives in Karachi. She works for a bank and also opened a bakery in tax year 2027. She rents out a flat. She has no other income.

Tax year 2027

Head	Amount (Rs.)
Salary	2,400,000
Income from property (rent)	600,000
Income from Business (bakery)	loss of 800,000

Step 1: Section 56 set-off. The loss cannot reduce salary (section 56(1)) or rent (the 2025 proviso). Salary of Rs. 2,400,000 and rent of Rs. 600,000 are taxed in full.

Step 2: Carry forward. The whole Rs. 800,000 goes to tax year 2028 under section 57.

Tax year 2028: the bakery makes a profit of Rs. 500,000.

Step 3: Set off Rs. 500,000 of the brought-forward loss. Business income for 2028 = Rs. 0. Loss left = Rs. 800,000 - 500,000 = Rs. 300,000.

Tax year 2029: profit of Rs. 700,000.

Step 4: Set off the remaining Rs. 300,000. Business income = Rs. 700,000 - 300,000 = Rs. 400,000.

The loss of tax year 2027 could have been carried forward at most to tax year 2033, the sixth tax year after it was first computed. Sana’s salary and rent were taxed in full throughout. In tax years 2028 and 2029, section 114(1)(b)(ii) requires a return because she claims a carried-forward loss.

This example assumes none of the loss came from depreciation. If part did, that part would follow the section 57(4) rules instead.

What if I have losses from two different years?

Section 57(3) sets off the loss of the earliest tax year first. That protects the older loss from expiring while a newer one is used.

What if I bought the business from someone else?

Section 59A(4)(b) says a person who succeeds another person in a business, otherwise than by inheritance, is not entitled to carry forward and set off the previous owner’s loss. Buying a running shop does not bring its past losses with it.

Section 59A(7) adds that a loss is carried forward under section 57 only if it has been assessed or determined under one of the assessment orders listed in that sub-section. The loss has to be established for the year it arose before it can be used later.

What if I closed the business?

Section 57 carries a loss forward only against income chargeable under the head Income from Business. If there is no business income in later years, the loss has nothing to be set against. The Ordinance does not provide a way to use it against salary or rent instead.

Common mistakes

• Relying on older guidance about rent. The words excluding income from property were removed from section 56(1) by the Finance Act, 2021, and a proviso barring business losses against property income was added by the Finance Act, 2025. Guidance written between those dates may be out of date.
• Setting a loss against salary. Section 56(1) excludes salary.
• Carrying forward beyond six years. Section 57(2) sets a six tax year limit for the general loss.
• Not filing in the claim year. Section 114(1)(b)(ii) requires a return when a carried-forward loss is claimed.

What to check in the official text

Read section 56 with its proviso and the note that it was added by the Finance Act, 2025. Read section 57 in full, especially sub-sections (4) and (5) on the depreciation part of a loss. Sub-sections (2A), (2B) and (2C) give longer periods only to specific banks, hotel companies and Pakistan International Airlines, not to sole proprietors.