Capital losses are not interchangeable with salary, business income or interest income. Indian income-tax law keeps them inside the capital-gains bucket and then applies a further distinction between short-term and long-term losses. That distinction determines what can be adjusted now and what can be carried forward.
The Income Tax Department's set-off and carry-forward FAQ confirms that the basic architecture continues under the Income Tax Act, 2025, including preservation of eligible losses brought forward from years governed by the 1961 Act. The Department's section 70 guidance also sets out the core short-term versus long-term capital-loss rule.
Short-term capital loss: what can it be set off against?
A short-term capital loss is the more flexible of the two. It can be set off against capital gains from another capital asset, including both short-term capital gains and long-term capital gains. It cannot be used to reduce salary, house-property income, business income or income from other sources merely because those incomes arise in the same year.
For example, suppose an investor has a short-term capital loss of ₹1,20,000 on shares, a short-term capital gain of ₹40,000 on another investment and a long-term capital gain of ₹90,000 on a separate asset. The short-term loss can first absorb the ₹40,000 short-term gain and the remaining ₹80,000 can be adjusted against the long-term gain, leaving ₹10,000 of capital gain before applying the relevant computation and rate provisions.
Long-term capital loss: the narrower rule
A long-term capital loss can be set off only against long-term capital gains. It cannot be adjusted against a short-term capital gain, even though both amounts fall under the head Capital gains.
Assume a taxpayer has a long-term capital loss of ₹2 lakh and a short-term capital gain of ₹2.5 lakh, with no long-term capital gain. The long-term loss cannot wipe out the short-term gain. Subject to the filing conditions, the eligible long-term loss must instead be carried forward for possible adjustment against long-term capital gains in later years.
Can capital loss be adjusted against salary or business income?
No. Capital losses are ring-fenced from other heads of income. This is an important difference from some non-capital losses, for which inter-head set-off may be available subject to statutory restrictions. A taxpayer with a large capital loss and a large salary cannot simply net the two to reduce taxable salary.
The Income Tax Department's official loss set-off guide expressly notes that capital losses cannot be adjusted against income from other heads.
How long can an eligible capital loss be carried forward?
Eligible short-term and long-term capital losses can be carried forward for up to eight assessment years under the 1961 Act framework. The Income Tax Department's transition FAQ states that valid brought-forward capital losses from years before 1 April 2026 continue under the 2025 Act without restarting the original carry-forward clock.
That means a loss does not receive a fresh eight-year life merely because the new Act applies from Tax Year 2026-27. The remaining period continues from the original loss year.
Why timely filing of the loss return matters
Carry-forward eligibility is not only about the nature of the loss. The return-filing condition matters. The Department's transition FAQ gives a clear example: a loss from an earlier year that was filed belatedly and therefore failed the conditions of section 139(3) read with section 80 of the 1961 Act does not become eligible merely because the 2025 Act later comes into force.
Practically, investors and businesses should not wait until a future profitable year to reconstruct old losses. The loss should be correctly reported in the return for the year in which it arises, within the applicable statutory framework, and the carry-forward figure should be reconciled year after year.
Current-year set-off versus brought-forward loss
It helps to separate two steps. First, compute the current year's gains and losses and apply the permitted intra-head set-off. Second, bring in eligible losses carried forward from earlier years and apply them according to their preserved character. A brought-forward long-term capital loss remains long-term in nature; it does not turn into a general capital loss that can absorb short-term gains.
Practical year-end capital-loss checklist
- Classify every disposal correctly: determine whether each resulting gain or loss is short-term or long-term under the applicable asset-specific rules.
- Separate capital losses from other heads: do not net them against salary, business income or interest in the tax working.
- Use short-term losses flexibly: test them against both short-term and long-term capital gains.
- Restrict long-term losses: use them only against long-term capital gains.
- Track unused losses by year: maintain a schedule showing the original year, nature, amount used and balance remaining.
- Check return-filing eligibility: confirm that the loss was validly reported so that carry forward is available.
- Reconcile with the return: the carry-forward schedule in the tax working should agree with the filed return and prior-year records.
Common mistakes to avoid
- Using a long-term capital loss against a short-term capital gain.
- Setting capital losses off against salary or business income.
- Assuming every reported loss can automatically be carried forward despite a late return.
- Forgetting the original eight-year carry-forward clock when moving from the 1961 Act to the 2025 Act.
- Keeping only a net capital-loss figure without separately tracking short-term and long-term balances.
Practical takeaway
The simplest way to remember the rule is: short-term capital loss can absorb either type of capital gain, while long-term capital loss can absorb only long-term capital gain. Neither can be used against other heads of income. Report eligible losses correctly, preserve their short-term or long-term character, and maintain a year-wise carry-forward schedule so that future gains can be matched without losing a valid tax benefit.
