Capital Loss Set-Off and Carry Forward Under the 2025 Act
- The rules, section by section
- Short-term or long-term
- Worked example: the order of set-off changes the tax
- How set-off interacts with the ₹1.25 lakh equity threshold
- Carry forward: the 8-year and due-date conditions
- Common mistakes
- Year labels
- Where this fits
From tax year 2026-27, a short-term capital loss can be set off against any capital gain, short-term or long-term. A long-term capital loss can be set off only against long-term capital gains. A capital loss can never be set off against salary, business income or any other head. Whatever is left can be carried forward for eight tax years under the same restrictions, but only if the loss was declared in a return filed by the due date.
These rules sit in sections 108, 109, 111 and 121 of the Income-tax Act, 2025. The sequence matters, because the order in which you use losses can change the tax you pay.
The rules, section by section
| Section | Rule |
|---|---|
| 108(2)(a) | A loss on a short-term capital asset is set off against income from any other capital asset in the same year |
| 108(2)(b) | A loss on a long-term capital asset is set off only against income from any other long-term capital asset in the same year |
| 109(2) | A loss under “Capital gains” cannot be set off against income under any other head |
| 109(1) | A loss under another head (for example house property, within ₹2,00,000) can be set off against capital gains |
| 111(1) | Unabsorbed capital losses are carried forward: short-term against any capital gains, long-term only against long-term gains |
| 111(2) | No capital loss is carried forward for more than eight tax years after the year in which it was first computed |
| 121 | A loss not determined in pursuance of a return filed under section 263(1) cannot be carried forward and set off under section 111(1) |
Short-term or long-term
Whether a loss is short-term or long-term follows the holding period in section 2(101):
- 12 months for listed securities, units of an equity-oriented fund, UTI units and zero-coupon bonds;
- 24 months for most other assets.
Gains on units of a specified mutual fund bought on or after 1 April 2023 are always short-term under section 76, whatever the holding period. A loss on those units is therefore also short-term.
Worked example: the order of set-off changes the tax
Ananya is a resident individual. Her other income already exceeds the basic exemption limit. Her capital transactions in tax year 2026-27:
| Item | Amount | Taxed under |
|---|---|---|
| Short-term gain on listed shares (STT paid) | ₹1,00,000 | Section 196, 20% |
| Long-term gain on equity mutual fund units | ₹2,50,000 | Section 198, 12.5% above ₹1,25,000 |
| Short-term loss on debt fund units | (₹60,000) | — |
| Long-term loss on listed shares | (₹1,80,000) | — |
Illustrative figures; cess and surcharge ignored for clarity.
The long-term loss has only one home. It must go against the long-term gain, leaving ₹70,000 of long-term gain. The short-term loss can go against either gain, and the choice matters:
| Route 1: short-term loss against short-term gain | Route 2: short-term loss against long-term gain | |
|---|---|---|
| Short-term gain remaining | ₹40,000 | ₹1,00,000 |
| Long-term gain remaining | ₹70,000 | ₹10,000 |
| Tax on short-term gain at 20% | ₹8,000 | ₹20,000 |
| Tax on long-term gain (only above ₹1,25,000) | Nil | Nil |
| Total | ₹8,000 | ₹20,000 |
Section 108(2)(a) allows a short-term loss to be set off against “income computed in respect of any other capital asset” and does not prescribe an order among them. Route 1 is therefore open to her, and it saves ₹12,000. The general lesson: use short-term losses against gains taxed at the highest rate first. Do not spend them on long-term equity gains that would have fallen within the ₹1,25,000 exemption anyway. To see how your own short-term and long-term losses, including losses brought forward, set off against each kind of gain, use the capital loss set-off planner.
How set-off interacts with the ₹1.25 lakh equity threshold
Losses are set off while computing total income under Chapter VII of the Act. Section 198 then taxes long-term gains on listed equity and equity-oriented fund units that exceed ₹1,25,000. So a long-term loss reduces the gain first, and only what remains is compared with the threshold.
If your long-term equity gains are already below ₹1,25,000, a long-term loss set against them saves no tax that year. Section 108(2)(b) does not let you skip the set-off either.
Carry forward: the 8-year and due-date conditions
Suppose that in tax year 2026-27 Vikram has a long-term capital loss of ₹3,00,000 and no capital gains at all. Under section 111 he can carry the ₹3,00,000 forward:
- It can be set off only against long-term capital gains in later years.
- It is available for the eight tax years after 2026-27, that is, up to tax year 2034-35.
- In each later year it is used against that year’s long-term gains, and only the balance moves on.
The condition people miss is section 121. The loss must have been determined in pursuance of a return filed under section 263(1), which means a return filed by the due date. For an individual whose accounts do not need audit and who has no business income, the due date in the section 263(1) table is 31 July of the next financial year. A belated return filed after that date keeps your gains taxable but loses the right to carry the capital loss forward.
House property losses are different. Section 121 does not list section 110 (house property), so a house property loss can be carried forward even from a belated return, for eight years, against house property income only.
Common mistakes
- Not filing a return in a loss-only year. No tax is payable, but without a return filed on time the loss is lost for good.
- Setting a capital loss against salary. Section 109(2) forbids it, whatever the size of the loss.
- Using a long-term loss against short-term gains. Neither section 108(2)(b) nor section 111 allows it.
- Ignoring the regime rule for house property. Under the new regime, section 202(2)(b)(ii) blocks setting a house property loss against other heads, including capital gains.
- Losing track of the year of origin. The eight-year clock runs from the year the loss was first computed, not from the year you first use it.
Year labels
This page covers tax year 2026-27 onwards under the Income-tax Act, 2025. Losses first computed in years governed by the Income-tax Act, 1961 are not lost: under section 536(2)(n), a capital loss brought forward from those years is set off against capital gains computed under the 2025 Act in the manner provided in the 1961 Act, up to eight years after the year in which it was first computed. See tax year vs assessment year for the other transition rules.
Where this fits
- Work out a gain or loss: capital gains calculator
- The two equity rates: LTCG vs STCG on equity
- A gold-bond exit that is now taxable: SGB tax after Finance Act 2026
- Filing on time: revised and updated returns after Finance Act 2026
Sources. Income-tax Act, 2025, sections 2(101), 76, 108, 109, 110, 111, 121, 196, 198, 202 and 263(1), as published in the Gazette of India on 21 August 2025, and section 263(1) as substituted by section 66 of the Finance Act, 2026.