Setting off and carrying forward losses

Part of Tax on investments. 6 min read. Free lesson with a short video, quiz and practice.

Losses are part of investing. The tax law lets you use some losses to reduce taxable gains, either in the same year (set-off) or in later years (carry forward). The rules depend on the kind of loss.

Capital losses

• A short-term capital loss can be set off against short-term or long-term capital gains.
• A long-term capital loss can be set off only against long-term capital gains.
• Capital losses can never reduce salary, interest or business income.
• Unused capital losses can be carried forward for 8 years, but only if you file your return by the due date.

A worked example

In one year, Kiran has:

• Short-term gain on Fund A: ₹80,000
• Short-term loss on Share B: ₹50,000
• Long-term gain on Share C: ₹2,00,000
• Long-term loss on Fund D: ₹30,000

Step 1: short-term loss against short-term gain: ₹80,000 − ₹50,000 = ₹30,000 short-term gain.

Step 2: long-term loss against long-term gain: ₹2,00,000 − ₹30,000 = ₹1,70,000.

Step 3: subtract the ₹1.25 lakh equity exemption: ₹45,000 taxable long-term gain.

Tax: 20% × ₹30,000 + 12.5% × ₹45,000 = ₹6,000 + ₹5,625 = ₹11,625, plus cess = ₹12,090. Without the losses, the tax would have been much higher.

Other kinds of losses

In the new regime, a loss from house property cannot reduce income from other heads.

File on time

The most common mistake: filing late and losing the right to carry forward losses. Even in a year with only losses and no tax to pay, file your return by the due date and report the losses. Your broker's capital gains statement shows each realised loss.