Carrying forward capital losses: 8 years, one trap

The rules in four lines

A capital loss you cannot use this year is not wasted. Under the carry-forward rules (section 74 of the old Act, renumbered in the Income-tax Act 2025 with the same effect):

1. Short-term losses can be set off against short-term or long-term gains.
2. Long-term losses can be set off only against long-term gains.
3. Unused losses carry forward for eight assessment years and keep their character.
4. The loss carries forward only if the return for the loss year is filed by the due date. A belated return keeps the loss from moving forward; see what a missed deadline costs.

The losses go in Schedule CFL of the return each year, so they must be reported every year until used, not just the first.

A three-year example

Year 1. You sell some small-cap fund units at a short-term loss of ₹3,00,000 and have no gains. You file on time. ₹3 lakh of short-term loss carries forward.

Year 2. You realise short-term gains of ₹1,00,000 and long-term gains of ₹1,50,000.

Year 3. The remaining ₹50,000 is used against whatever gains come next.

The trap

Look at year 2 again. The loss absorbed ₹2,50,000 of gains but saved only ₹24,050. Of the ₹1.5 lakh long-term gain, ₹1.25 lakh would have been tax-free anyway under the yearly exemption. The loss was spent cancelling gains that carried no tax.

You cannot stop that. A brought-forward loss must be set off against capital gains of the first year in which there are any; you cannot hold it back for a year with larger, fully taxed gains. The ₹1.25 lakh exemption is then applied to whatever long-term gain remains after the set-off.

Compare a year 2 with ₹3,00,000 of short-term gains instead: the same loss would have saved 3,00,000 × 20% × 1.04 = ₹62,400, more than two and a half times as much.

Using that to your advantage

Since a carried loss will be used in the next year that has gains, make that year's gains count:

• Book more short-term gains in the same year if you were going to sell anyway. They are taxed at 20%, so they are the best use of a short-term loss.
• Realise long-term gains beyond ₹1.25 lakh in that year, so the loss is not entirely spent on exempt gains. This is the reverse of the usual gain harvesting approach.
• Mind the clock. Eight years is long, but a loss from a bad 2026 still expires. Track it.

In the year the loss itself arises, you also have some choice in how a short-term loss is set off. That order is covered in the tax-loss set-off order.

Reading this

• Gains and losses are invented. Rates are 20% short-term and 12.5% long-term above ₹1.25 lakh for listed equity, plus 4% cess; surcharge is ignored.
• Loss and gain figures are after the cost and sale price of each sale, as shown on a capital gains statement.
• This explains the rules. It is not advice for a particular return.