Share Losses in ITR: How Capital Loss Set-Off Works in India

A losing investment is painful enough. What many investors miss is that, under India's tax rules, a booked capital loss is not always wasted — it can reduce tax on capital gains, in the same year or later. But the rules are strict and asymmetric: a short-term loss is flexible, a long-term loss is not, and a loss never reported on time can disappear entirely.

Yes — capital losses on shares and mutual funds can be set off against capital gains: a short-term capital loss (STCL) can offset both short-term and long-term gains, while a long-term capital loss (LTCL) can offset only long-term gains. Unused losses can be carried forward for up to 8 assessment years, but only if the return for the loss year was filed by the due date.

A capital loss arises when you sell a capital asset — such as listed shares or equity mutual fund units — for less than what you paid for it, including eligible costs. For listed equity shares and equity-oriented funds, the dividing line is 12 months: held for 12 months or less, the loss is short-term; held for more than 12 months, it is long-term. Two boundaries matter. Only realised losses count — a fall in shares you still hold is a paper loss, not a tax loss. And the loss must be reported in your return's capital gains schedule for set-off and carry-forward to work.

The rules, under Sections 70, 71 and 74 of the Income-tax Act, work like this: STCL can be set off against STCG and against LTCG. LTCL can be set off only against LTCG — never against STCG. Capital losses cannot be set off against salary, house property, business income, or other sources. They stay inside the capital gains head. Within the same year, losses are first adjusted within the capital gains head; what remains unabsorbed can be carried forward. That asymmetry is the single most common mistake. An investor with a ₹5 lakh long-term loss and ₹3 lakh of short-term gains, but no long-term gains, still pays full tax on the short-term gains. The long-term loss simply waits for a future long-term gain — or expires unused.

Take a simplified illustration, before cess and surcharge, using current equity rates: short-term capital gains (STCG) on listed equity taxed at 20%, and long-term capital gains (LTCG) at 12.5% above the ₹1.25 lakh annual exemption under Section 112A. Example 1 — short-term loss. Suppose you have STCG of ₹3,00,000 and STCL of ₹2,00,000 in the same year. The loss offsets the gain, leaving taxable STCG of ₹1,00,000. Tax at 20% is ₹20,000, instead of ₹60,000 on the full ₹3,00,000 — a saving of ₹40,000 in this illustration. Example 2 — long-term loss, used carefully. Suppose you have LTCG of ₹5,00,000 and LTCL of ₹2,00,000. The first ₹1,25,000 of LTCG is already exempt, so the loss should absorb taxable gains above that exemption, not waste itself against the exempt slice. Applied to the taxable portion, taxable LTCG falls from ₹3,75,000 to ₹1,75,000, and tax at 12.5% falls from ₹46,875 to ₹21,875 — a saving of ₹25,000 in this illustration.

These are simplified illustrations, not computations for any individual return. Actual tax depends on asset type, holding period, acquisition date and other income; a chartered accountant should verify figures before filing.

If losses exceed gains in a year, the unabsorbed balance can be carried forward for up to 8 assessment years. In a carry-forward year, the same asymmetry applies: brought-forward STCL can offset STCG or LTCG, while brought-forward LTCL can offset only LTCG. But there is a condition that destroys the whole benefit if missed: the return for the year in which the loss arose must be filed by the due date under Section 139(1). Section 80 bars carry-forward of capital losses (and business losses) if that original return was belated. Filing even a day late can permanently forfeit up to 8 years of carry-forward potential. In practice, the loss year is the year to get right. Keep your broker or fund capital gains statement, reconcile it with the Annual Information Statement, and report the loss in Schedule CFL even in a year when you owe no tax on gains. A loss you do not report is a loss you cannot carry.

Three traps deserve a clear warning. First, capital losses cannot reduce your salary tax. A ₹2 lakh share loss does not cut tax on a ₹2 lakh salary increment. The heads of income are separate, and capital losses stay within capital gains. Second, crypto and other virtual digital asset (VDA) losses cannot be set off at all — not against other VDA gains, not against equity gains — and cannot be carried forward. VDA gains are taxed at 30% under Section 115BBH, with only the cost of acquisition deductible. A crypto loss is, for tax purposes, a dead end. Third, the exemption trap: do not waste a long-term loss against the first ₹1.25 lakh of equity LTCG, which is already tax-free. The set-off order matters, and this is one place where filing software or a CA's review earns its fee.

"Tax-loss harvesting" means deliberately booking losses before year-end to offset gains. Done carefully — for example, selling a holding you no longer want — it is legitimate planning. Done carelessly, it backfires: selling a holding you believe in purely for a tax saving means transaction costs, a changed portfolio, and the risk of missing a recovery. Tax should influence timing, rarely be the sole reason to exit. Only a genuine sale creates a tax loss.

1. Download the capital gains statement for every broker and fund. 2. Split gains and losses into short-term and long-term, by holding period. 3. Apply STCL first to both kinds of gains; reserve LTCL for LTCG only. 4. Protect the ₹1.25 lakh LTCG exemption from being wasted by LTCL. 5. File the loss year's return by the due date, and record the balance in Schedule CFL. 6. Keep VDA losses separate — they get no set-off and no carry-forward.

Educational content only — not financial advice. Consult a SEBI-registered investment adviser for personal guidance; investments are subject to market risk.

Sources: Income-tax Act provisions Sections 70, 71, 74, 80, 111A, 112A, 115BBH and 139(1), as summarised by multiple tax guides corroborating each other (Endovia Wealth, Patron Accounting, FirstReports, TaxSocial, StockCalc, October 2026 and earlier); equity STCG 20% and LTCG 12.5% above ₹1.25 lakh from Finance Act 2024 changes effective 23 July 2024.