Losing money is never pleasant, but what if the losses on your investments resulted in tax savings? Capital losses are not only disheartening in the realm of investing and personal finance, but they can also have strategic value. You can use these losses to lower your taxable gains and your income tax bill, regardless of whether you booked a loss on mutual funds, sold shares at a lower price, or experienced a decline in the value of your real estate.
The articles will shed light on the rules for setting off and carrying forward capital losses, as well as how investors convert losses into valid tax-saving strategies year after year.
Understanding Capital Losses?
Capital losses include capital assets like stocks, bonds, real estate, etc., that are sold at a lower price than what it is purchased for. It is the monetary loss that the investor has to suffer due to various reasons, like wrong investment decision, fall in the market price, etc.
For example: If you purchased 10 stocks of Rs. 300, amounting to Rs. 3000 at Rs. 200 each, amounting to Rs. 2000, then you suffer a capital loss of Rs. 1000.
Type of capital loss
| Type of Capital Loss | Holding Period | Examples |
| Short-Term Capital Loss (STCL) | Asset held for 36 months or less (12 months for listed equity shares/mutual funds) | Sold shares within a year at a lower price |
| Long-Term Capital Loss (LTCL) | Asset held for more than 36 months (12+ months for listed equity shares/mutual funds) | Sold the property after 3 years at a lower price |
How Can Capital Losses Be Used to Save Tax?
Let’s dissect how capital losses can be used to save tax:
1. Setting Off Capital Losses Against Capital Gains
Although there are particular matching requirements, you can deduct capital losses from capital gains made in the same year:
| Loss Type | Can be Set Off Against |
| Short-Term Capital Loss (STCL) | Short-Term Gains & Long-Term Gains |
| Long-Term Capital Loss (LTCL) | Long-Term Gains only |
Example 1: STCL Set Off
- The short-term capital gain (STCG) from the sale of stocks was ₹40,000.
- Mutual fund short-term capital loss (STCL) of ₹25,000.
The STCL can be completely turned off in opposition to the STCG.
₹40,000 – ₹25,000 = ₹15,000 is the net taxable gain.
Instead of paying ₹40,000 in taxes, you now only pay ₹15,000.
Example 2: LTCL Set Off
- Long-Term Capital Gain (LTCG) on listed shares: ₹60,000.
- Long-Term Capital Loss (LTCL) on equity mutual funds: ₹35,000.
You can reduce your net LTCG to ₹25,000 by setting off LTCL against LTCG.
2. Carrying Forward Capital Losses
Indian tax laws permit you to carry forward the unadjusted loss to subsequent years if you experience a capital loss during a fiscal year and are unable to completely offset it against your capital gains in the same year.
- Carry Forward Period: For a maximum of eight assessment years after the year the loss was incurred, you are able to carry forward both STCL and LTCL.
- Filing Requirement: In accordance with the Income Tax Act’s specified section, you must file your Income Tax Return (ITR) before the deadline to carry forward losses. The carryover benefit is forfeited if the return is filed after the deadline.
- Same Head Requirement: Capital losses can only be deducted from capital gains, meaning that the carried forward loss can only be deducted from income under the same head.
Example:
| Year | Capital Gain | Capital Loss | Carry Forward from Previous Year | Net Taxable Capital Gain |
| 2023–24 | ₹0 | ₹50,000 STCL | — | ₹0 |
| 2024–25 | ₹30,000 STCG | ₹0 | ₹50,000 STCL | ₹0 (₹20,000 STCL remains) |
| 2025–26 | ₹40,000 LTCG | ₹0 | ₹20,000 STCL | ₹20,000 LTCG (STCL adjusted) |
3. Harvesting Tax Losses: A Clever Approach
Many investors employ the tax-loss harvesting strategy, which involves selling losing assets before the year is out in order to realise the loss.
- Use that loss to offset taxable gains.
- You have the option to reinvest in the same or a similar asset following a cooling-off period.
Investors can therefore maximise their portfolios without paying additional taxes.
For example, you made ₹2 lakh in LTCG after investing in one mutual fund.
Another fund has an unrealised loss of ₹50,000.
Selling the loss-making fund now reduces your LTCG to ₹1.5 lakh, lowering your tax liability because LTCG on equity over ₹1.25 lakh in a financial year is taxed at a rate of 12.5% (without indexation) under current rules.
Bottomline
Capital losses are tools, not failures, in a world of finance where every rupee saved is a rupee earned. The Income Tax Act offers a clear framework to help you reduce your tax liability through set-offs and carry forwards, regardless of whether you’re dealing with losses from real estate sales, mutual funds, or equity markets.
Understanding the differences between short-term and long-term losses and using loss harvesting before the end of the fiscal year will help you optimise your tax outflow rather than merely responding to market volatility. What might seem like a mistake now could pave the way for more intelligent and effective investing down the road with the correct strategy.
Written by: Tanya Kumari
