My business made a loss. Can I carry it forward, and for how many years?

A business loss is not wasted if it cannot be used in the year it happens. Section 57 of the Income Tax Ordinance, 2001 carries it forward, but only against future business income and only for a limited number of years. Depreciation that could not be absorbed follows a separate rule.

What does the law say?

Step one is section 56. A loss under one head is first set off against income under other heads in the same year, within the limits in section 56(1) (covered on a separate page). Section 56(2) says a loss that cannot be set off that way cannot be carried forward “except as provided in this Part”.

Section 57 is that exception for business losses.

• 57(1): the part of a business loss not set off under section 56 is carried forward to the following tax year and set off against income chargeable under the head Income from Business for that year.
• 57(2): anything still not set off is carried forward again, “and so on”, but no loss can be carried forward to more than six tax years immediately succeeding the tax year for which it was first computed.
• 57(3): where losses from more than one year are carried forward, the loss of the earliest tax year is set off first.
• 57(4): the part of the loss attributable to deductions for depreciation, initial allowance, first year allowance for alternate energy and amortisation of intangibles that has not been set off is set off against fifty percent of the balance business income, after the section 57(1) set-off, in the following year and so on until completely set off. The limit is one hundred percent of that balance if taxable income for the year is less than ten million rupees.
• 57(5): in deciding whether those depreciation-type deductions have been set off, they are taken into account last.

Section 57(1) expressly does not cover a loss to which sub-section (4) or section 58 applies. Section 58 deals with speculation business: a speculation loss is set off only against income from another speculation business, also for up to six years.

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

How does it work in practice?

Each year’s loss has its own six-year clock, starting from the tax year in which it was first computed. A loss for tax year 2026 can be used in tax years 2027 to 2032 at most. If the business also has a loss from tax year 2028 carried forward, the 2026 loss is used first under section 57(3).

Because section 57(5) takes depreciation into account last, the part of a loss that remains unabsorbed is treated as depreciation first. That part moves under section 57(4) rather than the six-year rule.

Worked example (illustrative figures)

Bilal opens a printing shop in Rawalpindi. He has no other income. Made-up figures:

Tax year 2026: receipts Rs. 3,000,000; running expenses Rs. 3,500,000; depreciation Rs. 400,000.

1. Total deductions: Rs. 3,500,000 + Rs. 400,000 = Rs. 3,900,000.
2. Loss: Rs. 3,900,000 minus Rs. 3,000,000 = Rs. 900,000.
3. Depreciation is taken into account last (section 57(5)), so receipts absorb Rs. 3,000,000 of running expenses first. Unabsorbed running expenses: Rs. 500,000. Unabsorbed depreciation: Rs. 400,000.
4. Rs. 500,000 is carried forward under section 57(1) and (2). Rs. 400,000 is carried forward under section 57(4).

Tax year 2027: business income before losses is Rs. 1,000,000.

1. Set off the section 57(1) loss: Rs. 1,000,000 minus Rs. 500,000 = Rs. 500,000 balance.
2. Taxable income is well under Rs. 10,000,000, so unabsorbed depreciation can be set off against one hundred percent of the balance: Rs. 500,000 minus Rs. 400,000 = Rs. 100,000.
3. Business income for tax year 2027: Rs. 100,000. Both carried-forward amounts are fully used.

If tax year 2027 had instead produced only Rs. 200,000 of business income, Rs. 300,000 of the ordinary loss would move on to tax year 2028, and could be carried no later than tax year 2032.

What if …?

What if my taxable income is Rs. 10 million or more? Section 57(4) limits the set-off of unabsorbed depreciation to fifty percent of the balance business income for that year. The rest waits for later years. The text does not say whether “taxable income for the year” is measured before or after that set-off.

What if I did not file a return for the loss year? Section 114(1)(b)(ii) ties the filing duty to claiming a carried-forward loss. The Ordinance’s consequences for a missing return are outside this page.

What if the business closes? Section 57 sets carried-forward losses against income under the head Income from Business. It does not carry them to other heads.

Common mistakes

• Setting a carried-forward loss against salary or rent. Section 57(1) allows set-off only against business income in later years.
• Using the newest loss first. Section 57(3) requires the earliest year’s loss to be set off first.
• Treating the whole loss as subject to the six-year limit. Unabsorbed depreciation moves under section 57(4).
• Mixing speculation losses with ordinary business losses. Section 58 keeps them separate.

What to check in the official text

Read sections 56, 57 and 58 together, and section 114(1)(b)(ii) on returns. Sub-sections (2A), (2B) and (2C) of section 57 give longer periods to specific entities such as certain banking companies, hotel companies and one airline; they do not apply to a sole proprietor.