How to Set Off Capital Losses Against Gains in India

Atmabhan Pandit (Shrikant Bhosale)
Founder, TWIST POOL Labs  ·  TAC Research  ·  NanoCERN Unit, Pune
First-principles finance educator  ·  10+ years in Indian capital markets
 ORCID: 0009-0003-1953-7932

Losses are painful. But under Indian tax law, they are also assets — if you know how to use them. The rules for setting off capital losses against capital gains are specific, and getting them right can save meaningful amounts of tax every year.

1. The Master Rule: Four Combinations

Key asymmetry: STCL is more flexible (can offset both STCG and LTCG). LTCL can only offset LTCG. This is why realising STCL for tax-loss harvesting is often more powerful than realising LTCL.

2. Same-Year Set-Off (Within a Financial Year)

If you have both gains and losses in the same financial year, they are netted automatically.

Example:

• LTCG from selling property: ₹8,00,000
• STCL from selling mid-cap shares (held 7 months): (₹2,50,000)
• LTCL from selling unlisted shares: (₹1,20,000)

Calculation:

• LTCG net: ₹8,00,000 − ₹1,20,000 (LTCL) = ₹6,80,000
• Now set off STCL against remaining LTCG: ₹6,80,000 − ₹2,50,000 = ₹4,30,000 net LTCG
• Tax on ₹4,30,000 LTCG: After ₹1,25,000 exemption = ₹3,05,000 × 12.5% = ₹38,125

Without the losses, tax would have been on ₹6,75,000 net LTCG = ₹84,375. Saving: ₹46,250.

3. Carry-Forward Set-Off (Across Financial Years)

If you cannot fully absorb losses in the current year, they carry forward.

Carry-forward rules:

• STCL: Carries forward 8 years; can be set off against STCG or LTCG in future years
• LTCL: Carries forward 8 years; can only be set off against LTCG in future years
• Speculative loss: Carries forward 4 years; only against speculative income

Mandatory conditions for carry-forward:

1. The loss must be declared in ITR for the year it occurred
2. ITR must be filed before the due date (typically July 31 or extended deadline)
3. Applicable to: ITR-2 (capital losses) and ITR-3 (business + capital losses)

4. The ITR Reporting Process

In ITR-2 / ITR-3:

Step 1: Schedule CG (Capital Gains Tax in India)

• Report all short-term gains and losses in B1/B2
• Report all long-term gains and losses in respective sections
• The schedule automatically computes net gains after set-off

Step 2: Schedule CYLA (Current Year Loss Adjustment)

• If losses > gains in current year, this schedule identifies the excess loss
• This excess is automatically populated in Schedule CFL (Carry Forward Losses)

Step 3: Schedule CFL (Carry Forward of Losses)

• Shows losses being carried from previous years being brought forward
• Lists losses newly being carried forward to future years

Step 4: Schedule TR (Taxes and Relief)

• Final computation of tax after all set-offs

5. Common Mistakes

Mistake 1: Forgetting to declare losses in ITR because “there’s no tax to pay.” You must file ITR to carry forward the loss even if your tax liability is zero.

Mistake 2: Using LTCL to offset STCG. The law does not allow this — only STCL can offset STCG.

Mistake 3: Not filing on time. A delayed ITR forfeits carry-forward rights for that year’s losses.

Mistake 4: Confusing speculative business loss (intraday equity) with STCL (delivery equity). They are different types and have different set-off rules.

The Smart Friend’s Verdict

Capital loss rules in India are investor-friendly if you follow them correctly. The key is timely filing and accurate categorisation of loss types. The 8-year carry-forward window is long enough to utilise losses even if markets take time to produce offsetting gains.

Every March, review your P&L. Every July, file ITR on time. Those two habits protect your right to carry forward losses — which can save significant tax in profitable years.

Back to Tax-Loss Harvesting for the proactive strategy to create useful losses.

Frequently Asked Questions