Set-Off and Carry Forward of Capital Losses: Complete Rules Explained
- Asharam Swain
- Nov 5
- 9 min read
Capital losses can significantly impact tax planning if not managed correctly. The Income Tax Act, 1961 allows taxpayers to reduce their taxable income by setting off such losses against capital gains in the same or future years. The concept of set-off and carry forward helps individuals and businesses optimize their tax outgo by adjusting losses within defined limits and time frames. With recent Budget 2025 changes expanding flexibility, understanding these provisions has become crucial for effective tax management.
Table of Contents
Understanding Set-Off and Carry Forward of Capital Losses
Set-off and carry forward of capital losses are essential mechanisms under the Income Tax Act, 1961, that help taxpayers minimize their tax liability. When a taxpayer incurs a loss from the sale of capital assets, such as shares, property, or mutual funds, these losses can be adjusted or carried forward to reduce the overall tax burden. The concept of set-off allows losses to be adjusted against capital gains in the same financial year, while carry forward provisions permit unadjusted losses to be used in subsequent years. This ensures that investors and taxpayers can plan their tax liabilities efficiently and avoid losing the benefit of capital loss deductions.
Types of Capital Losses and How They Are Treated
Capital losses are classified into two categories: short-term capital loss (STCL) and long-term capital loss (LTCL).
Short-term capital loss can be set off against both short-term and long-term capital gains, giving taxpayers flexibility in adjusting their tax liabilities.
Long-term capital loss, however, can only be set off against long-term capital gains. The recent amendment in Budget 2025 introduced a temporary relaxation allowing capital losses incurred up to March 31, 2026, to be set off against any capital gains—short-term or long-term. This move aims to simplify the process and promote investment. Unadjusted capital losses can be carried forward for up to eight assessment years, provided the income tax return is filed within the due date.
Set-Off Rules Under the Income Tax Act
Set-off refers to adjusting losses against income within the same financial year. There are two types of set-offs:
Intra-head set-off:Â This allows adjustment of losses against income under the same head. For instance, losses from one capital asset can be adjusted against gains from another capital asset.
Inter-head set-off: This permits losses under one head of income to be adjusted against another, except against salary income. However, there are restrictions. For example, capital losses cannot be set off against business or salary income. These rules ensure that capital losses are only used to offset similar income sources, maintaining the integrity of the tax structure.
Carry Forward of Capital Losses: Duration and Conditions
If capital losses cannot be fully set off in the same year, they can be carried forward to future assessment years. Capital losses, both short-term and long-term, can be carried forward for eight consecutive years. However, this benefit is available only if the taxpayer files their income tax return before the due date. The carried-forward losses can then be adjusted against eligible capital gains in subsequent years. This rule, governed by Sections 70 to 74 of the Income Tax Act, ensures that taxpayers can utilize their losses effectively over time, reducing the overall tax impact.
Set-Off and Carry Forward Rules for Other Losses
Apart from capital losses, other categories of losses also have specific treatment under the Income Tax Act:
Business losses:Â Non-speculative business losses can be set off against any business income and carried forward for eight assessment years.
Speculative business losses:Â Can only be set off against speculative business income and carried forward for four years.
Losses under house property: Can be set off only against income from house property but may be carried forward for eight years even if the return is filed after the due date. Understanding these differences helps taxpayers apply the correct set-off and carry forward rules for different types of income.
Is Set-Off of Capital Loss Allowed in the New Tax Regime?
Under the new tax regime governed by Section 115BAC, capital gains and losses are treated similarly to the old regime, meaning taxpayers can still set off and carry forward capital losses. The main difference lies in the disallowance of certain exemptions and deductions. However, capital gains and their related losses continue to follow the same adjustment principles under both regimes. Taxpayers should assess which regime provides better overall benefits after factoring in the availability of set-offs and deductions.
Section 79 and Restrictions on Carry Forward for Companies
Section 79 of the Income Tax Act imposes restrictions on companies regarding the carry forward of losses. If there is a change in shareholding exceeding 49% during the previous year, the company may not be allowed to carry forward its accumulated losses. This provision aims to prevent misuse of loss carry-forward benefits in corporate restructurings or ownership changes. Exceptions exist for certain categories, such as startups recognized by the Department for Promotion of Industry and Internal Trade (DPIIT).
Practical Example: How Set-Off Works
Consider a taxpayer who incurs a short-term capital loss of ₹60,000 from the sale of mutual funds and a long-term capital gain of ₹1,20,000 from selling property in the same year. The taxpayer can set off the ₹60,000 loss against the ₹1,20,000 gain, reducing the taxable capital gain to ₹60,000. If the loss could not be fully adjusted due to insufficient gains, it could be carried forward for up to eight years and set off against future capital gains. This example demonstrates how effective use of set-off provisions can lower tax liability significantly.
Common Mistakes Taxpayers Make
Many taxpayers lose valuable tax benefits due to common errors such as:
Missing the income tax return filing deadline, which makes losses ineligible for carry forward (except house property losses).
Incorrectly classifying capital gains and losses as short-term or long-term.
Failing to maintain purchase and sale records, resulting in disallowed claims during scrutiny. Such mistakes can easily be avoided through professional guidance and accurate record-keeping.
Importance of Timely ITR Filing for Claiming Losses
Timely filing of the income tax return is crucial for availing the carry forward benefit. Except for house property losses, all other losses can only be carried forward if the ITR is filed within the statutory deadline. Late filing deprives the taxpayer of this benefit, even if the loss is genuine. Filing on time ensures compliance, enables accurate adjustment of losses, and simplifies future tax planning.
How TaxBuddy Simplifies Set-Off and Carry Forward
TaxBuddy’s AI-powered filing system automatically detects and calculates eligible capital losses and adjusts them against corresponding capital gains. It ensures compliance with the latest provisions of the Income Tax Act and minimizes errors. The platform also keeps track of unadjusted losses for future years, offering a seamless way to optimize tax filings. TaxBuddy’s expert-assisted plans make it easier for taxpayers to identify loss carry forward opportunities and file returns accurately without missing deadlines.
Conclusion
The set-off and carry forward provisions of capital losses offer taxpayers a practical means to reduce tax liability and manage their investments effectively. The 2025 amendments have further simplified these processes, giving temporary flexibility for loss adjustment. Efficient use of these provisions, coupled with timely ITR filing, can lead to significant tax savings. For anyone looking for assistance in tax filing, it is highly recommended to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1. Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options? TaxBuddy offers complete flexibility by providing both self-filing and expert-assisted options. Taxpayers who are confident in managing their taxes can use the self-filing plan powered by AI-driven tools that guide them through every step of the ITR process. For those who prefer professional help, the expert-assisted plan connects users with qualified tax professionals who review documents, identify applicable deductions, and ensure error-free filing. This dual approach caters to both tech-savvy users and those seeking personalized assistance.
Q2. Which is the best site to file ITR?Â
The best site to file an income tax return depends on the user’s comfort level, accuracy needs, and available support. While the Income Tax Department’s e-filing portal is the official platform, private platforms like TaxBuddy simplify the process with features such as automated form filling, document upload, AI-based tax calculations, and instant verification. TaxBuddy stands out for offering both DIY and expert-guided options, ensuring users experience a smooth and secure filing process without worrying about missed deductions or errors.
Q3. Where to file an income tax return?Â
An income tax return can be filed directly on the Income Tax Department’s official e-filing website (incometax.gov.in) or through authorized private portals like TaxBuddy. While the government portal provides a standard interface for manual filing, TaxBuddy offers a faster, guided process with automated calculations and 24/7 support. It ensures that even first-time filers can submit their ITRs accurately and claim eligible benefits. TaxBuddy also provides real-time updates on refund status and post-filing assistance, making it an all-in-one tax solution.
Q4. How long can capital losses be carried forward?Â
Under the Income Tax Act, 1961, both short-term and long-term capital losses can be carried forward for eight consecutive assessment years immediately following the year of loss. However, this benefit applies only if the income tax return is filed within the prescribed due date. During these eight years, the taxpayer can use the carried-forward losses to offset eligible capital gains in subsequent years. It’s important to track these losses year by year to ensure they are fully utilized before expiry.
Q5. Can long-term capital loss be set off against short-term capital gain?Â
No, long-term capital losses (LTCL) can generally only be set off against long-term capital gains (LTCG). However, Budget 2025 introduced a temporary relaxation allowing capital losses incurred up to March 31, 2026, to be adjusted against any type of capital gain—short-term or long-term. This one-time flexibility aims to encourage investment and simplify compliance during the transition phase of the new tax regime. After this period, standard set-off rules will continue to apply.
Q6. What is intra-head set-off in taxation?Â
Intra-head set-off refers to adjusting a loss from one source of income against profit from another source under the same head. For example, a short-term capital loss from mutual fund investments can be adjusted against a short-term or long-term capital gain from the sale of property. This process helps taxpayers minimize their total taxable income within a single income category. Intra-head set-off must be applied before any inter-head set-off is considered.
Q7. What is inter-head set-off?Â
Inter-head set-off allows taxpayers to adjust losses under one head of income against income under another head, with certain exceptions. For example, a loss from house property can be set off against income from business or capital gains, but not against salary income. Similarly, capital losses cannot be set off against business or salary income. This rule ensures that losses are logically matched with comparable income categories, maintaining consistency and fairness in tax computation.
Q8. Can business losses be set off against salary income?Â
No, business or professional losses cannot be set off against salary income as per Section 71 of the Income Tax Act. This restriction ensures that salary earnings remain unaffected by business-related risks. However, business losses can be adjusted against other types of income such as capital gains or income from other sources, subject to certain conditions. Taxpayers should maintain separate records for business and employment income to ensure accurate computation and compliance.
Q9. Is return filing before the due date mandatory for carrying forward losses?Â
Yes, timely filing of the income tax return is mandatory for carrying forward most types of losses. As per Section 80 of the Income Tax Act, losses such as capital loss or business loss can only be carried forward if the return is filed on or before the due date under Section 139(1). The only exception is losses from house property, which can be carried forward even if the return is filed late. Timely filing ensures that taxpayers can preserve their loss carry-forward benefits and claim them in future years.
Q10. Can speculative losses be carried forward?Â
Yes, speculative business losses—such as those from share trading or derivative transactions—can be carried forward for up to four assessment years. However, they can only be set off against speculative business income in future years. Non-speculative business income or capital gains cannot be used to offset speculative losses. This distinction is important because speculative income carries a higher degree of risk, and the law restricts its adjustment to maintain equity among taxpayers.
Q11. Which sections of the Income Tax Act deal with loss set-off and carry forward?Â
The provisions governing the set-off and carry forward of losses are primarily covered under Sections 70 to 80 of the Income Tax Act, 1961.
Section 70: Intra-head set-off rules
Section 71: Inter-head set-off rules
Section 72: Carry forward of business losses
Section 73: Speculative business loss rules
Section 74: Capital loss adjustment and carry forward
Section 79: Restrictions for companies in case of shareholding changes Together, these sections form the legal framework for handling losses and ensuring compliance with tax laws.
Q12. How can TaxBuddy help in optimizing capital gain taxation?
TaxBuddy simplifies the management of capital gains and losses through intelligent automation. Its AI-driven system identifies eligible losses for set-off, tracks unadjusted amounts, and ensures they are properly carried forward in future filings. The platform also helps in choosing between the old and new tax regimes based on potential tax savings. With expert-assisted support, TaxBuddy ensures accurate computation, compliance with the latest rules, and timely filing—empowering users to optimize their tax positions and avoid errors or missed deductions.
