In this guide
How capital loss works in an income tax return
A capital loss arises when the sale or transfer of a capital asset results in a loss under the tax rules. It may relate to shares, mutual funds, land, a building, gold or another capital asset.
You may be able to set the loss off against eligible capital gains. Any eligible loss left over can generally be carried forward for up to eight assessment years, provided that you file the loss return by the applicable due date under Section 139(1).
AY 2026-27 covers income earned in FY 2025-26 (1 April 2025 to 31 March 2026). Returns for AY 2026-27 are governed by the Income-tax Act, 1961. The Income-tax Act, 2025 applies from 1 April 2026, but its repeal and saving provisions preserve eligible capital losses from earlier years under the old Act’s set-off rules and remaining carry-forward period.
Short-term and long-term capital losses
Whether a loss is short-term or long-term depends on the asset’s holding period and applicable tax rules.
| Loss type | Set-off against current-year capital gains | Set-off against future-year capital gains |
|---|---|---|
| Short-term capital loss (STCL) | Short-term or long-term capital gains | Short-term or long-term capital gains |
| Long-term capital loss (LTCL) | Long-term capital gains only | Long-term capital gains only |
An STCL can be set off against either type of capital gain. An LTCL can be set off only against long-term capital gains.
A capital loss generally cannot be set off against income under another head, such as salary, house-property income, business income or income from other sources. This restriction applies to current-year and brought-forward capital losses.
How to set off a capital loss
Calculate the capital gains and losses for each asset under the applicable rules. Then set eligible losses against capital gains for the same year.
Example 1: Short-term capital loss
Assume you have an STCL of ₹80,000, short-term capital gains of ₹30,000 and long-term capital gains of ₹70,000. Set off ₹30,000 of the loss against the short-term gains. The remaining ₹50,000 can reduce the long-term gains, leaving ₹20,000.
Example 2: Long-term capital loss
Assume you have an LTCL of ₹1,00,000, short-term capital gains of ₹60,000 and long-term capital gains of ₹1,40,000. The LTCL can reduce the long-term gains to ₹40,000. It cannot be used against the ₹60,000 short-term gains.
If losses exceed gains for the year, the unadjusted amount may be carried forward if you meet the filing requirements. Keep the calculation by asset and loss type so your return reflects the correct adjustments.
Carry forward a capital loss for up to eight years
Section 74 generally allows eligible capital losses to be carried forward for eight assessment years immediately following the assessment year in which the loss was incurred. The type of loss continues to matter during that period: an STCL can be set off against short-term or long-term gains, while an LTCL can be set off only against long-term gains.
For example, a capital loss incurred in FY 2025-26 belongs to AY 2026-27. If eligible for carry-forward, AY 2027-28 is the first following assessment year in which it may be used.
The Income-tax Act, 2025 does not restart the carry-forward period for eligible capital losses from earlier years. The loss retains its original character and can be used under the preserved rules for the remaining years.
A carried-forward loss can be set off only against eligible capital gains. It cannot reduce salary or interest income.
The filing deadline is important
To carry forward a capital loss, file the return on or before your applicable due date under Section 139(1). Filing by the belated-return deadline is not enough to meet this condition.
For AY 2026-27, the relevant dates include:
| Taxpayer or return category | Due date for AY 2026-27 |
|---|---|
| Individuals filing ITR-1 or ITR-2 who are not subject to audit | 31 July 2026 |
| Non-audit business cases and trusts covered by the revised due date | 31 August 2026 |
| Specified audit cases whose original due date was 31 October 2026 and was extended by CBDT | 21 November 2026 |
| Belated return, generally | 31 December 2026, or before completion of assessment, whichever is earlier |
The applicable date depends on your filing category. For example, an individual reporting capital gains in ITR-2 generally follows the individual due date. A taxpayer with business income or an audit obligation may have a different due date. Check the date that applies to your case and any CBDT extension.
If you miss your Section 139(1) due date, you may still be able to file a belated return under Section 139(4) by the applicable deadline. You can report the loss, but a late-filed capital loss generally cannot be carried forward. A late-filing fee or interest may also apply, depending on your circumstances.
Verify your return on time, too. If you file electronically, complete e-verification within the prescribed period. Delayed verification can affect the date on which the return is treated as filed.
How to report a capital loss in your ITR
Report capital gains and losses using the return form that applies to your status and income. Individuals and HUFs without business or professional income commonly use ITR-2 if they meet its conditions. If you have business or professional income, ITR-3 may apply. Companies, firms and other entities use their applicable forms.
For AY 2026-27, check the current return form and e-filing utility. In general:
- Enter sale and acquisition details in Schedule CG.
- Report current-year loss adjustments in the relevant current-year set-off schedule.
- Report eligible unadjusted amounts in Schedule CFL (Carry Forward of Losses).
- Check that brought-forward losses and amounts used match your records and previous returns.
The return utility may calculate totals from the information you provide, but check the transaction dates, cost, sale proceeds, classification and set-off yourself. TaxClear’s ITR form selection guide for AY 2026-27 explains how your income sources affect the form choice. See the AY 2026-27 online ITR guide for filing steps.
Records to keep
Keep documents that support both the loss calculation and timely filing:
- Purchase and sale contract notes or transaction statements;
- Broker, mutual fund or registrar statements;
- Property purchase and sale documents, if relevant;
- Evidence of acquisition cost and eligible transfer expenses;
- Calculations showing whether each loss is short-term or long-term;
- Copies of filed ITRs and acknowledgements;
- E-verification confirmation; and
- Schedule CFL details showing losses carried forward and set off.
Reconcile brought-forward losses with the return in which each loss was first reported. Do not claim a loss again if it has already been used, and do not increase a carried-forward balance without supporting records.
Special cases and limits
Virtual digital assets: Transactions involving virtual digital assets have separate restrictions under Section 115BBH. Do not assume that a loss from a virtual digital asset can be set off or carried forward like an ordinary capital loss from shares, mutual funds or property.
Restricted transactions: A loss is not automatically eligible just because sale proceeds are lower than the purchase price. Check whether the asset and transfer are taxable and whether a specific restriction applies. Anti-avoidance provisions may also restrict some loss claims.
Different types of assets: Eligible capital losses may generally be set off against capital gains from different types of assets, subject to the short-term and long-term rules and any special restrictions. A mutual fund’s classification and holding period may differ from those of listed shares. TaxClear’s mutual fund capital gains guide for AY 2026-27 discusses fund classification and ITR reporting.
Common mistakes to avoid
- Setting off an LTCL against short-term capital gains;
- Reducing salary or interest income by a capital loss;
- Assuming a belated return preserves the right to carry forward a loss;
- Forgetting that the carry-forward period is limited to eight succeeding assessment years;
- Reporting a loss in the current year but omitting eligible amounts from Schedule CFL;
- Claiming an old loss without checking the original return and remaining carry-forward period; and
- Treating a virtual digital asset loss as an ordinary capital loss.
Frequently asked questions
Can an STCL be set off against long-term capital gains?
Yes. An STCL can generally be set off against either short-term or long-term capital gains.
Can an LTCL be set off against short-term capital gains?
No. An LTCL can generally be set off only against long-term capital gains.
Can I set off a capital loss against salary or interest income?
Generally, no. Capital losses are set off against eligible income under the Capital Gains head, not salary, interest or other heads.
How long can I carry forward a capital loss?
An eligible capital loss can generally be carried forward for eight assessment years immediately following the assessment year in which it was incurred.
Can I carry forward a loss if I file a belated return?
Generally, no. The loss return must be filed by the applicable Section 139(1) due date to preserve the carry-forward benefit.
Does the new Income-tax Act reset the carry-forward period?
No. The transitional rules preserve eligible capital losses without restarting the original eight-year period.
