Direct and Indirect Taxation · Set off and Carry Forward of Losses

Capital Losses and Losses from Other Sources: Set Off and Carry Forward

Updated 10 October 2026 · Fact-checked

Short-term capital loss sets off against any capital gain, short-term or long-term. Long-term capital loss sets off only against long-term capital gain. Unabsorbed capital losses carry forward for 8 tax years if the return was filed on time. Race horse losses set off only against race horse income and carry forward 4 years. Lottery losses get no relief.

Understand Capital Losses and Losses from Other Sources

A capital loss arises when you transfer a capital asset for less than its cost of acquisition (after the permitted adjustments). Like a gain, it is either short-term or long-term, depending on how long you held the asset. The Income-tax Act, 2025 keeps the two types of loss separate.

The rule is simple once you see it. A short-term loss is the more flexible one. It can be set off against any capital gain, whether short-term or long-term. A long-term loss is restricted. The Act permits it to be set off only against long-term capital gain. It cannot reduce a short-term gain.

No capital loss can be set off against income under any other head, such as salary, house property, business or other sources. If the loss cannot be fully absorbed in the year, the balance is carried forward for up to 8 tax years immediately following the tax year in which the loss arose. A carried-forward loss follows the same restriction: short-term loss against any capital gain, long-term loss against long-term gain only. The key condition is that the loss must have been determined in a return filed within the due date. If you file late, the capital loss is lost for carry forward, though it can still be set off in that same year.

Two other sources of loss have special rules. A loss from owning and maintaining race horses can be set off only against income from the same activity, and it can be carried forward for 4 tax years, again subject to a timely return. Losses from lotteries, crossword puzzles, card games, gambling and betting get no relief at all. They cannot be set off against any income and cannot be carried forward.

Also remember that a loss is recognised only if the gain on that asset would have been taxable. If a gain on an asset would have been exempt, the loss on it cannot be claimed.

Key rules to remember

Short-term capital loss (STCL) set off: STCL → short-term capital gain, then long-term capital gain; Allowed within the same tax year. Never against other heads.
Long-term capital loss (LTCL) set off: LTCL → long-term capital gain only; Cannot be set off against short-term capital gain.
Carry forward of capital loss: Unabsorbed loss carried to the 8 tax years immediately following the loss year; Return for the loss year must be filed by the due date. Set off only against capital gains of the same kind as above.
Race horse loss: Loss from owning and maintaining race horses → income from race horses only; carry forward 4 tax years; Set off only against income from owning and maintaining race horses; carry forward needs a timely return.
Lottery, gambling and betting loss: No set off, no carry forward; Winnings are taxed at a flat special rate without deduction of expenses or losses.
Order of set off: Current year loss first, then brought-forward loss (earliest year first); Apply short-term loss rules and long-term loss rules separately to each loss.

How to solve Capital Losses and Losses from Other Sources questions

Use this order for any computation question that has capital gains, capital losses or race horse and lottery figures.

1List every gain and loss separately: STCG, LTCG, STCL, LTCL, race horse income or loss, lottery winnings or loss, and other heads.
2Set off current-year STCL first against STCG, then against LTCG if any STCL remains.
3Set off current-year LTCL against LTCG only. Never against STCG.
4Then apply brought-forward capital losses (earliest year first) to the remaining gains, STCL against any capital gain and LTCL against LTCG only. Check that each loss is still within its 8-year window and was determined in a timely return.
5Treat race horse loss separately: set it off only against race horse income and carry forward the balance for 4 years. Ignore lottery losses completely.
6Write the net capital gain (STCG and LTCG separately), since they have different rates of tax, and add it to the other heads for total income.
7Show the closing carry-forward balances with the last tax year in which each can be used.

Quickest way: Four-line capital loss check

When to use it: Use it for MCQs and for the first pass of a numerical, before you write the full statement.

Short-term loss: can hit any capital gain.
Long-term loss: can hit only long-term gain.
Carry forward: 8 tax years for capital loss, 4 for race horse loss, none for lottery loss, and only if the return was filed on time.
Anything left that cannot be set off goes to a carry-forward line. Never to salary, house property, business or other sources.

Common mistakes in Capital Losses and Losses from Other Sources

Setting off long-term capital loss against short-term capital gain
Students remember that capital losses set off against capital gains and forget the one-way restriction.
Fix: Write the rule next to your working: LTCL only against LTCG. STCL can go against both.
Setting off a capital loss against salary or business income
Confusion with the general inter-head rule, which applies to other heads.
Fix: Capital loss stays inside the capital gains head. Only capital gains can absorb it.
Allowing carry forward even though the return was filed late
Students ignore the filing condition mentioned in the facts.
Fix: Check the filing date in the question. A late return means the loss is set off in the current year if possible but is not carried forward.
Using 8 years for race horse losses or for lottery losses
The 8-year period is memorised for all losses.
Fix: Race horse loss is 4 years and only against race horse income. Lottery, gambling and betting losses cannot be set off or carried forward at all.
Counting the 8 years from the wrong year
Students include the loss year itself.
Fix: The 8 years start from the tax year after the loss year. A loss of 2026-27 can be used up to 2034-35.
Claiming a loss on an asset whose gain would be exempt
Students compute the loss mechanically and ignore the exemption condition.
Fix: Ask: would a gain on this asset have been taxable? If it would have been exempt, do not allow the loss.

Worked examples

Example 1

Rohan has a salary of ₹6,00,000 for the tax year 2026-27. His capital transactions are: short-term capital gain on shares ₹90,000; long-term capital gain on land ₹1,50,000; short-term capital loss on unlisted shares ₹1,20,000; long-term capital loss on a plot ₹70,000. Compute the net capital gains and any loss carried forward.

Show the solution

Set off STCL on unlisted shares ₹1,20,000 against STCG ₹90,000. STCG becomes nil. STCL of ₹30,000 remains.
Set off the remaining STCL ₹30,000 against LTCG ₹1,50,000. LTCG becomes ₹1,20,000.
Set off LTCL ₹70,000 against LTCG ₹1,20,000. LTCG becomes ₹50,000.
All losses are absorbed, so nothing is carried forward.
Net capital gains: STCG nil, LTCG ₹50,000. Salary of ₹6,00,000 is unaffected by the capital losses.

Answer: Net long-term capital gain is ₹50,000 and short-term capital gain is nil. No loss is carried forward. Salary income is not reduced.

Example 2

Meera incurred a long-term capital loss of ₹2,00,000 in the tax year 2026-27 and filed her return before the due date. In 2027-28 she has STCG of ₹1,00,000 and LTCG of ₹60,000. In 2028-29 she has LTCG of ₹90,000. Show the set off and carry forward, and the last year in which any balance can be used.

Show the solution

Tax year 2026-27: the loss has no gain to absorb. The full ₹2,00,000 is carried forward because the return was filed on time.
Tax year 2027-28: LTCL cannot be set off against STCG ₹1,00,000, so STCG is fully taxable.
Set off the brought-forward LTCL against LTCG ₹60,000. LTCG becomes nil. Balance LTCL = ₹2,00,000 − ₹60,000 = ₹1,40,000.
Tax year 2028-29: set off ₹1,40,000 against LTCG ₹90,000. LTCG becomes nil. Balance = ₹1,40,000 − ₹90,000 = ₹50,000.
The balance ₹50,000 can be carried forward up to the 8th tax year after 2026-27, which is 2034-35.

Answer: In 2027-28 taxable STCG is ₹1,00,000 and LTCG is nil. In 2028-29 LTCG is nil. A loss of ₹50,000 remains and can be used only against long-term capital gains up to the tax year 2034-35.

Exam tips

In an MCQ, the trap is nearly always LTCL against STCG. Eliminate that option first.
Always show the set off in two blocks: current-year losses first, then brought-forward losses. Step marks come from the order.
Read the facts for the return filing date. A late return is a deliberate clue that carry forward is denied.
Keep race horse and lottery items in a separate working note so the examiner sees you applied different rules.
State the last tax year of carry forward for each balance. It is an easy mark to collect.

Practice questions from Set off and Carry Forward of Losses

Capital Losses and Losses from Other Sources in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Capital Losses and Losses from Other Sources: frequently asked questions

Can long-term capital loss be set off against short-term capital gain?

No. The Act permits long-term capital loss to be set off only against long-term capital gain. Short-term capital loss is the one that can be set off against both short-term and long-term capital gains.

For how many years can capital loss be carried forward?

Unabsorbed short-term and long-term capital losses can be carried forward for 8 tax years immediately following the tax year in which the loss arose. The loss must have been determined in a return filed on time.

How is loss from race horses treated?

A loss from owning and maintaining race horses can be set off only against income from the activity of owning and maintaining race horses. If it is not fully absorbed, it is carried forward for 4 tax years, again subject to a timely return.

Can I set off a lottery or gambling loss against other income?

No. Losses from lotteries, crossword puzzles, card games, gambling and betting cannot be set off against any income and cannot be carried forward.