Short-term capital loss (STCL) can be set off against both STCG and LTCG; long-term capital loss (LTCL) can be set off only against LTCG. Unused capital losses can be carried forward for 8 assessment years, but only if you file your return within the due date (Sec. 139(3)). Crypto/VDA losses cannot be set off or carried forward. (Income Tax Department, Income Tax India)
Why this matters
Markets fluctuate. When you book losses on shares, mutual funds, property, or gold, the set-off rules determine how much of your future gains you can shield from tax—critical for both retail and HNI investors optimizing post-tax returns in India.
The core rulebook (at a glance)
| Loss type you have | You can set off against | Carry forward | Key conditions |
| STCL | STCG and LTCG | Up to 8 AYs | Loss carry-forward allowed only if you file within Sec. 139(1) due date. (Income Tax Department, Income Tax India) |
| LTCL | Only LTCG | Up to 8 AYs | Same timely-filing requirement under Sec. 139(3). (Income Tax Department, Income Tax India) |
| Capital loss vs other heads | Not allowed (no set-off against Salary/Business/Other sources) | — | Capital losses are adjustable only within the Capital Gains head. (Income Tax Department) |
| Crypto/VDA losses | No set-off (even against other VDAs) | No carry-forward | Taxed u/s 115BBH at 30%; only cost of acquisition is deductible. (Income Tax India) |
Note for equity investors: For listed equity/equity funds (Sec. 112A), the LTCG exemption is ₹1.25 lakh per FY for transfers on/after 23-Jul-2024, and tax above that is at 12.5%. Don’t waste losses against the first ₹1.25 lakh of exempt LTCG. (Income Tax India)
Intra-head vs inter-head set-off
- Intra-head: Adjust losses within “Capital Gains” first (STCL ↔ STCG/LTCG; LTCL ↔ LTCG only).
- Inter-head: Capital losses cannot be adjusted against other heads (e.g., salary or business). Some other heads (like house property) have their own rules, but they don’t mix with capital losses. (Income Tax Department)
Carry forward: the 8-year window (and the one thing that voids it)
- You may carry forward unabsorbed capital losses for 8 assessment years.
- To carry them forward, file your return within the due date u/s 139(1); otherwise, the right to carry forward capital losses lapses. (Belated filing is fine for many things, but not for carrying forward capital or business losses.) (Income Tax India)
Worked examples (India-centric)
Example 1: Equity + mutual funds (most common)
- This year’s outcomes
- STCL from a mid-cap stock: ₹60,000
- STCG (Sec. 111A) from another stock: ₹40,000
- LTCG (Sec. 112A) from an equity fund: ₹1,80,000
Smart set-off order:
- Use ₹40,000 of STCL to fully offset STCG (111A @ 15/20%).
- Remaining ₹20,000 STCL can offset equity LTCG.
- For 112A, the first ₹1.25 lakh LTCG is exempt; apply the residual loss only on the taxable part above ₹1.25 lakh so you don’t waste the exemption. Net taxable LTCG = ₹1,80,000 − ₹1,25,000 − ₹20,000 = ₹35,000. (Income Tax India)
Rule of thumb:
Apply STCL first to STCG, then to LTCG above ₹1.25 lakh (112A). Save the exemption.
Example 2: Long-term loss on property
- LTCL on sale of land (held >24 months): ₹10,00,000
- STCG on debt mutual funds acquired on/after 1 Apr 2023: ₹3,00,000
- LTCG on gold ETF: ₹4,00,000
Result:
- LTCL can only offset LTCG (gold ETF): ₹4,00,000 used.
- Balance ₹6,00,000 LTCL carried forward (8 AYs). It cannot touch the STCG from debt funds. (Income Tax Department)
Example 3: Crypto loss
- Loss on sale of Bitcoin: ₹1,50,000
- Gains on equity MF: ₹2,00,000
Result:
- Crypto loss cannot be set off against any income, including equity gains; no carry-forward either (Sec. 115BBH). (Income Tax India)
How to actually claim set-off in your ITR
When filing ITR-2/3:
- Schedule Capital Gains: Enter sale details asset-wise.
- BFLA (Brought Forward Loss Adjustment): System nets earlier-year losses against current gains.
- CFL (Carry Forward Losses): Unused losses move to future years.
- Schedule VDA: Report crypto transactions separately (if any). (Income Tax Department)
Planning tips for Indian investors
- Don’t miss the deadline: To preserve carry-forward, file on time u/s 139(1)—usually 31 July for individuals not subject to audit. (Income Tax India)
- Mind the 112A exemption: Offset equity LTCG above the ₹1.25 lakh cushion first. (Income Tax India)
- Know what’s not “capital gains”: F&O trading is typically treated as business income (losses follow business-loss rules—not capital).
- Debt mutual funds (post 1 Apr 2023 rules) generate STCG at slab for many schemes; still, they remain under the Capital Gains head for set-off mechanics.
- Avoid sham “wash” trades: While India has no explicit “wash-sale” rule like the US, GAAR can deny benefits to transactions lacking commercial substance.
2025 law change: what transitions mean for your old losses
Parliament has passed the Income-tax Bill, 2025 (effective 1 Apr 2026). For losses brought forward from years before 1 Apr 2026, the Bill states they will continue to be carried forward and set off in the manner provided under the repealed Act—i.e., the old Section 74 framework (STCL vs LTCL rules) still governs their set-off. (The Indian Express)
Simple formula you can use
Net Taxable Capital Gains (year)
= (STCG − STCL applied) + (LTCG − LTCL applied − 112A exemption if equity)
Where:
- Apply STCL first to STCG, then to taxable LTCG.
- LTCL applies only to LTCG. (Income Tax Department)
Quick FAQs
Q1) Can I set off capital loss against salary or FD interest?
No. Capital losses can only be set off within the Capital Gains head. (Income Tax Department)
Q2) How long can I carry forward capital losses?
Up to 8 assessment years, provided your original loss return was filed within the Sec. 139(1) due date. (Income Tax India)
Q3) Can I set off LTCL against STCG?
No. LTCL can be adjusted only against LTCG. STCL can adjust both STCG and LTCG. (Income Tax Department)
Q4) Do crypto losses get any relief?
No. Under Sec. 115BBH, crypto/VDA losses cannot be set off or carried forward. (Income Tax India)
Q5) Where do I enter this in the ITR?
Schedules Capital Gains, BFLA, CFL, and VDA (if applicable). (Income Tax Department)
Bottom line
Understanding how set-off and carry-forward work can materially reduce your tax outgo—especially if you invest across equity, debt MFs, gold, and real estate. File on time, plan around the 112A exemption, and remember that crypto losses don’t help under current law.