Whenever you sell a capital asset such as shares, mutual funds, property, or bonds for less than the price you paid for it, there is said to be a capital loss. Capital loss is a very broad concept, and correctly understanding its nuances is very important. The better one can do this, the greater possibility of utilising it for advanced tax planning, portfolio re-balancing, and other major efficiency considerations.

The article provides an insight on the various domestic capital losses that find recognition under Indian tax laws and discusses the conditions relating to set-off and carry forward operation. Above all, it throws light on strategies that can be operationalised for the fullest benefit.

Realised vs. Unrealised Losses

Unrealised losses, often referred to as “paper losses,” occur when the market value of an asset falls, but the investor hasn’t sold the asset yet. Since no sale has taken place, these losses have no tax impact and can disappear if prices recover.

In contrast, realised losses arise only upon the actual sale of the asset at a price lower than the purchase price. These can be claimed in your income tax return and leveraged to reduce your tax liability. Only realised losses can be reported for tax benefits. Unrealised losses might later reverse if the asset recovers, so they remain speculative until sold.

Short‑Term vs. Long‑Term Capital Losses

India classifies capital losses based on holding periods:

• Short-Term Capital Loss (STCL): If you sell equity shares or equity mutual funds within 12 months, or other capital assets like real estate or gold within 36 months, and the sale results in a loss, it becomes STCL.
• Long-Term Capital Loss (LTCL): Applies when equity investments are held beyond 12 months, and other capital assets beyond 36 months, resulting in a loss.

STCL offers greater flexibility because it can be set off against both short-term and long-term capital gains. LTCL, on the other hand, can only offset long-term gains, unless you’re applying a one-time transitional provision.

Set-Off & Carry-Forward Rules for Capital Losses

1. Set-Off Rules

Under the current tax regime in India, capital losses can be used to offset capital gains to reduce tax liability, but there are specific rules governing how this set-off works. Short-term capital loss (STCL) can be adjusted against both short-term capital gains (STCG) and long-term capital gains (LTCG) within the same financial year, offering greater flexibility to taxpayers. However, long-term capital loss (LTCL) is more restricted as it can only be set off against long-term capital gains and cannot be used to offset any short-term gains. These provisions help in effective tax planning, especially for investors with mixed portfolios.

For example: Suppose you have an STCL of Rs 1 lakh and a property LTCG of Rs 1.5 lakh in the same year. You can set off the full Rs 1 lakh STCL against LTCG, reducing your taxable long-term gains to Rs 50,000. In the case of LTCL, a Rs 1.5 lakh loss can only reduce LTCG, it cannot offset STCG.

1. Carry Forward Rules

If losses can’t be fully adjusted in the same year, they can be carried forward for up to eight assessment years, but only if the Income Tax Return (ITR) is filed before the due date (typically July 31) of the assessment year. Unadjusted STCL and LTCL must follow the same set-off restrictions even after being carried forward.

2. One-Time Tax Flexibility (FY 2026–27)

A new reform under the Income Tax Bill 2025 introduces a one-time relaxation: LTCL incurred before March 31, 2026, can, in FY 2026–27 only, be set off against short-term capital gains as well. This transitional benefit is a strategic opportunity to accelerate loss utilisation.

Tax Rates and Impact

Capital gains tax rates have seen revisions:

• Short-Term Capital Gains (STCG) on equity and equity funds (held ≤12 months) are taxed at 15% or 20%, depending on the sale date under new rules.
• Long-Term Capital Gains (LTCG) beyond Rs 1 lakh (or Rs 1.25 lakh for FY 2025–26 onwards) are taxed at 10% or 12.5% without indexation benefits. (Property LTCG is taxed at 12.5% or 20% with indexation.)

Claiming capital losses helps reduce your net taxable gains and lowers tax liability significantly.

Tax Loss Harvesting: Turning Loss into Strategy

One practical tactic is tax-loss harvesting, which is strategically selling loss-making investments before the fiscal year-end to realise STCL or LTCL. Realised losses can then offset taxable gains from winners in your portfolio, reducing your overall tax outgo.

Remember, repurchasing the same investment immediately may violate prudent tax planning principles, so it’s advisable to wait for some period before reinvesting in the same asset.

Mistakes to Avoid

1. Missing the ITR filing deadline: You lose the ability to carry forward any capital losses if the return is filed late.
2. Incorrect set-off assumptions: LTCL cannot offset STCG unless it’s the 2026–27 one-time provision.
3. Mixing up income heads: Capital losses can’t be set off against salary, business income, or other heads.
4. Poor record-keeping: Keep documents, such as purchase/sale dates, costs, and brokerage statements for audit and loss claims.

Why Understanding Capital Losses Matters

Proper recognition and handling of capital losses helps you:

• Strategically manage tax burden across years.
• Make informed decisions about when to sell assets and avoid locking in paper losses.
• Plan using the 2026–27 LTCL offset flexibility.
• Ensure financial discipline and compliance in portfolio management.

Conclusion

Capital loss isn’t merely about losing money, as it can actually serve as a valuable tax asset when managed wisely. Here are some of the key points to remember:

• Only realised capital losses can be claimed.
• The classification of losses into short-term and long-term is crucial, as it determines the extent of set-off flexibility.
• STCL offer broader applicability, allowing set-off against both short- and long-term gains, while LTCL are restricted to offsetting only long-term gains, except for a one-time relief introduced for FY 2026–27.
• Unused losses can be carried forward for 8 years, only if you file your ITR on time.
• You can also benefit from strategies like tax-loss harvesting to align your portfolio with tax efficiency goals.

Ultimately, capital losses are not setbacks, but they are strategic tools in financial planning. Understanding how to navigate them is not optional, but essential for maximising returns and minimising tax burdens.

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