Can I set off my business loss against my salary or rental income?

A loss from your business cannot reduce your salary, and under the Ordinance as amended to 30 June 2026 it cannot reduce your rental income either. Section 56 of the Income Tax Ordinance, 2001 sets these limits, and section 57 decides what happens to the loss instead.

What does the law say?

How a loss arises. Section 11 sorts income into five heads: Salary, Income from Property, Income from Business, Capital Gains and Income from Other Sources. Under section 11(3), where the deductions under a head exceed the amounts chargeable under it, the person is treated as sustaining a loss for that head for that year.

Section 56(1): set-off in the same year. Subject to sections 58 and 59, a loss under any head can be set off against the person’s income chargeable under any other head for the year, with two limits:

1. The main text excludes “income under the head salary”.
2. A proviso, added by the Finance Act, 2025, says the adjustment of business loss “shall not be allowed against income from property for the tax year”.

Section 56(2): no general carry-forward. A loss that cannot be set off under sub-section (1) cannot be carried forward, except as provided in that Part of the Ordinance.

Section 56(3): order of set-off. Where a person has a loss under Income from Business and a loss under another head in the same year, the business loss is set off last.

Section 57: the carry-forward. The unused business loss is carried forward to the following tax year and set off against income under the head Income from Business, for up to six tax years. That is covered in detail on a separate page.

How does it work in practice?

For a salaried person or a landlord with a losing business, the effect is that the salary and rent are taxed as if the business did not exist that year. The business loss does not disappear: it waits for future business profits under section 57.

The two sections that section 56(1) is subject to point the same way. Section 58 confines a speculation business loss to speculation income. Section 59 says a capital loss is not set off against income under any other head, and is carried forward only against capital gains.

Worked example (illustrative figures)

Farah works as an accounts officer in Karachi on a salary of Rs. 2,400,000 for tax year 2027. She lets out a flat for Rs. 600,000 a year and runs an online clothing business that made a loss of Rs. 900,000. She has no other income. All figures are made up.

1. Salary: Rs. 2,400,000. Section 56(1) excludes salary from set-off. Taxable salary stays Rs. 2,400,000.
2. Income from property: Rs. 600,000. The proviso to section 56(1) bars the business loss. Rental income stays Rs. 600,000.
3. Other heads: none, so nothing is available for set-off in tax year 2027.
4. Loss carried forward: Rs. 900,000 goes to tax year 2028 under section 57, to be set off against business income only.

In tax year 2028, if the clothing business makes a profit of Rs. 1,100,000, the carried-forward loss reduces it to Rs. 1,100,000 minus Rs. 900,000 = Rs. 200,000. Her salary and rent in 2028 are again unaffected.

What if …?

What if I have a capital gain in the same year? Capital Gains is not one of the heads excluded by section 56(1) or its proviso, so the text allows a business loss to be set off against it, subject to sections 58 and 59. Some gains are taxed under separate provisions that are outside this page.

What if both my business and my property made a loss? Section 56(3) says the business loss is set off last. The property loss is used first against eligible heads, which keeps more of the business loss available for section 57.

What if the business loss is from speculation? Section 58 restricts a speculation loss to income from another speculation business, so it is not set off against other heads at all.

Common mistakes

• Netting a shop loss against salary on the return. Section 56(1) excludes salary.
• Relying on older guidance about rental income. The footnotes show the words “or income from property” were omitted from section 56(1) by the Finance Act, 2021, and the proviso barring a business loss against income from property was added by the Finance Act, 2025. The answer for an older tax year depends on the version then in force.
• Assuming the loss is lost. The unused business loss carries forward under section 57, but only against business income.
• Treating a capital loss like a business loss. Section 59 keeps capital losses within the Capital Gains head.

What to check in the official text

Read section 11 on heads of income, section 56 with its proviso, and sections 57, 58 and 59. The proviso on income from property applies “for the tax year”, and its footnote records the Finance Act, 2025 as the source. If you are looking at a tax year before that change, check the version of section 56 in force for that year.