Capital loss set-off and carry-forward rules
How losses offset gains, and how long you can carry them forward.
A capital loss isn’t just a number to shrug off — it can genuinely reduce tax owed on other gains, sometimes for years after the loss itself happened. But the rules for which losses can offset which gains aren’t symmetric, and assuming they are is a common, costly mistake.
The rule that trips people up
A short-term capital loss (STCL) is flexible: it can be set off against both short-term gains and long-term gains in the same year. A long-term capital loss (LTCL) is far more restricted: it can only be set off against long-term gains — never against a short-term gain, no matter how large the loss or how small the short-term gain. The relationship runs one way, not both.
The same loss amount, two different outcomes
Take a ₹2,00,000 loss in two different scenarios — only the loss’s type changes.
A ₹5,00,000 long-term equity gain, alongside a ₹2,00,000 short-term loss. Since STCL can offset LTCG, the gain nets down to ₹3,00,000 before the ₹1,25,000 annual exemption applies, leaving ₹1,75,000 taxable at 12.5% — ₹22,750 including cess.
A ₹5,00,000 short-term equity gain, alongside a ₹2,00,000 long-term loss. It’s tempting to assume the loss reduces this gain the same way — it doesn’t. LTCL cannot touch STCG at all, so the full ₹5,00,000 is taxed at 20% — ₹1,04,000including cess, exactly as if the ₹2,00,000 loss didn’t exist for this year’s calculation. The loss isn’t wasted, but it does nothing here — it simply carries forward, unused, waiting for a long-term gain in a future year.
Same ₹2,00,000 loss, same underlying tax rates — but Scenario A saves real tax this year while Scenario B saves nothing this year, purely because of which type of loss it is and which type of gain it sits next to.
Estimate short and long-term tax on equity or property gains.
Carrying forward what’s left
Any loss that can’t be fully used in the same year doesn’t simply disappear — it can be carried forward for up to eight assessment years, and applied against eligible gains in any of those future years under the same rules that applied originally: a carried-forward short-term loss can still offset either short or long-term gains later; a carried-forward long-term loss can still only offset long-term gains later. The restriction travels with the loss, it doesn’t loosen with time.
There’s one condition that’s easy to miss: a loss can only be carried forward if it’s reported in a return filed by the original due date for that year. Filing late, or not reporting the loss at all, generally forfeits the right to carry it forward — even though the loss itself is real. Capital losses also stay within their own world: they can only ever be set off against capital gains, never against salary, business income, or any other head.
All figures are indicative and for educational purposes only — not financial advice.
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