What Is Capital Loss: Meaning, Set-Off Rules & Tax Treatment in India

Capital loss occurs when a capital asset is sold for less than its original purchase price.

It is different from business loss, which happens when goods are sold below their cost price.

Let’s say Raj bought a plot in 2019 for ₹12,00,000, expecting prices to rise. But in 2024, the market dipped, and he had to sell it for just ₹10,00,000. That’s a loss of ₹2,00,000. Now here’s the twist: Raj also sold some gold and made a long-term capital gain of ₹1,50,000 in the same year.

Here’s how he handled it smartly:
 

• He set off ₹1,50,000 of his land loss against the gold gain.
   
• So, he paid zero tax on that gain.
   
• The remaining ₹50,000 loss was carried forward for up to 8 years.
   

Isn’t that interesting? Even a loss can save you tax if you know how to use it right. This is exactly what capital loss is all about. 

This blog will explain what capital loss means, the rules for setting it off, and how it is taxed in India, helping you understand how to manage and reduce your tax liability effectively.

What is Capital Loss?

According to SEBI data, nearly 38% of retail investors in India reported losses in equity investments in 2024. These losses often fall under the category of capital losses.

A capital loss occurs when you sell a capital asset—like property, shares, mutual funds, or gold for less than what you paid for it. It’s not the same as a business loss, which happens when businesses sell goods below cost.

Let’s understand it with the help of an example:

Imagine you purchased a plot of land in 2019 for ₹10,00,000, expecting its value to rise. Fast forward to 2024, due to a real estate slump, you have to sell it for just ₹7,00,000. That’s a ₹3,00,000 loss on your investment.

Interesting fact? Capital losses aren’t entirely bad; they can help reduce your tax bill. For instance, if you had a long-term gain of ₹2,00,000 on gold, you could set off part of your land loss against this gain and pay tax only on the balance.

Types of Capital Loss

1. Short-Term Capital Loss (STCL):

A short-term capital loss happens when you sell an asset within one year at a loss. It helps reduce your taxable capital gains and can be carried forward to future years.

Let’s understand it with the help of an example:
Let’s say you bought shares worth ₹1,00,000 in January and sold them in June for ₹80,000.

You held the shares for less than one year and made a loss of ₹20,000 (₹1,00,000 - ₹80,000). This is called a short-term capital loss (STCL).

Now, suppose you also made a short-term capital gain of ₹15,000 on another investment. You can use your ₹20,000 loss to cancel out that ₹15,000 gain. You won’t pay tax on the gain, and the leftover ₹5,000 loss can be carried forward to next year to reduce future gains.

This way, STCL helps reduce your tax burden.

2. Long-Term Capital Loss (LTCL)

A long-term capital loss occurs when an asset held for more than 12 months is sold at a loss. LTCL is treated differently from STCL and can only offset long-term capital gains.

Let’s understand it with the help of an example:

Suppose you bought a plot of land for ₹12,00,000 and held it for 3 years. Later, you sold it for ₹10,00,000.

Since you held the asset for more than 12 months and sold it at a loss of ₹2,00,000, this is a Long-Term Capital Loss (LTCL).

Now imagine you also had a long-term capital gain of ₹1,50,000 from selling gold. You can use ₹1,50,000 of your LTCL to cancel that gain and pay zero tax on it. The remaining ₹50,000 loss can be carried forward for up to 8 years to adjust future long-term gains.

Unlike STCL, LTCL can only be set off against long-term gains, not short-term gains.

What is the Set-Off of Capital Losses?

Set-off means using your capital loss to reduce your capital gain in the same financial year, so that you pay less tax.

Rules for Set-Off under Income Tax Act:

The table below outlines the set-off rules for capital losses as per the Income Tax Act.
 

This highlights that while short-term losses have wider adjustment options, long-term losses are restricted to long-term gains only.

Important Rule: Capital loss cannot be set off against salary, business income, house property, or other sources.

What is Carry Forward of Capital Losses?

If you're not able to use (set off) your capital losses fully in the same year, don’t worry you can carry forward the unused loss and use it in future years.

Rules for Carry Forward:

The following are the key rules for carrying forward capital losses to future assessment years.
 

• You can carry forward both STCL and LTCL for up to 8 assessment years.
   
• In future years, you can set off:
   
  • STCL: against any capital gains (short-term or long-term).
     
  • LTCL: only against long-term capital gains.
     
• You must file your Income Tax Return on time (before the due date) to be eligible for carry forward.

Filing your Income Tax Return on time is essential to utilise these carry-forward benefits effectively.

Note: If you file your return late, you can still set off capital loss in the same year, but you cannot carry it forward to future years.

Let’s understand both with the help of an example:

Example: Mr. Chetan’s Capital Gains and Losses (FY 2024-25)

The table below shows Mr. Chetan’s capital gains and losses for the financial year 2024–25, including carried-forward losses from the previous year.
 

This data helps in determining his net taxable capital gains after adjusting current and brought-forward losses.

Step-by-Step Calculation:

Set-Off STCL against STCG:

Mr. Chetan has a short-term gain of ₹1,75,000 and a short-term loss of ₹42,000 (both in the same year).

So, 1,75,000 – 42,000 = ₹1,33,000, this is taxable Short-Term Capital Gain

Set-Off LTCL (from previous year) against LTCG:

He also has a long-term gain of ₹85,000 and a brought-forward LTCL of ₹96,000.

Since LTCL can only be set off against LTCG, he can adjust: 85,000 of 96,000 LTCL = ₹0 taxable LTCG

The remaining ₹11,000 of LTCL will be carried forward to future years.

Final Taxable Amount for AY 2025–26:

Here is the final calculation of taxable gains for Assessment Year (AY) 2025–26 based on the transactions made during the financial year.
 

This summary shows that only the short-term capital gain of ₹1,33,000 is taxable, while there is no long-term capital gain for AY 2025–26.

Summary Table: How Capital Losses are Adjusted

The table below explains how different types of capital losses can be adjusted against gains and carried forward for future years.
 

This shows that both short-term and long-term capital losses can be carried forward for up to 8 years, but their set-off rules differ.

Note: Carry forward allowed only if ITR is filed before the deadline!

Tax Treatment of Capital Loss in India:

In India, if you lose money by selling a capital asset like shares, property, or gold for less than what you paid for it, that is called a capital loss.

You are allowed to use this loss to reduce your taxable capital gains, which means you pay less income tax. But this benefit is only available if you report the loss properly in your Income Tax Return (ITR).

However, not all losses (like business losses or salary deductions) are considered capital losses. Only losses from selling capital assets are treated this way.

So, to save tax using a capital loss, you must:

1. Understand what counts as a capital loss,
    
2. Report it correctly in your ITR,
    
3. Follow the rules for set-off and carry forward.

This helps you legally reduce your tax burden.

Conclusion:

Capital loss happens when you sell something like shares or property for less than you paid. But don’t worry, you can use this loss to reduce your tax. You can adjust it against profits and even carry it forward for 8 years. Just file your return on time and follow simple rules to save money smartly!

FAQs:

Q: What is the set-off of capital losses?

It means adjusting capital losses against gains in the same year. Unused losses can be carried forward to future years for adjustment.

Q: Can short-term capital loss be set off against long-term capital gains?

Yes, short-term capital losses can be adjusted against both short-term and long-term capital gains, but only if the ITR is filed on time under Section 139(1).

Q: What is a set-off amount?

It is the net amount after adjusting mutual debts. For example, if you owe ₹100 and are owed ₹70, the set-off amount is ₹30.

Q: How to file a capital loss in ITR?

Report the capital loss in the ITR under the capital gains section. It can only be set off against capital gains, not other income heads.

 

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