NISM-Series-X-B: Investment Adviser (Level 2) · Capital Gains

Set-off and Carry Forward of Capital Losses and Advance Tax

Updated 11 October 2026 · Fact-checked

A capital loss is first set off against capital gains of the same year. Short-term loss can be set off against short-term or long-term gain. Long-term loss only against long-term gain. Unabsorbed losses are carried forward for 8 assessment years, if the return is filed on time. Advance tax applies to gains too.

Understand Set-off, Carry Forward of Capital Losses and Advance Tax

A capital loss arises when you sell a capital asset for less than its cost. The tax law lets you use that loss to reduce tax on other capital gains. This is called set-off. Whatever you cannot use in the year is carried forward.

There are two kinds of loss. Short-term capital loss (STCL) comes from assets held for a short period. Long-term capital loss (LTCL) comes from assets held longer. The holding period limit depends on the asset: for listed equity shares and equity-oriented mutual funds, more than 12 months is long term.

The key asymmetry: STCL is flexible and LTCL is restricted. STCL can reduce either short-term or long-term gains. LTCL can reduce only long-term gains. Capital losses can never be set off against salary, business or other income.

Carry forward works for 8 assessment years after the year of loss. A carried-forward STCL can be set off against both STCG and LTCG in later years. A carried-forward LTCL can be set off only against LTCG. To carry forward a loss, you must file the return by the due date under section 139(1). A late return loses this right.

Tax-loss harvesting means selling a loss-making investment before year-end to book the loss and reduce tax on gains. You may buy back the same asset afterwards. It defers tax; it does not remove it, because the lower cost raises future gains. Advance tax is payable on capital gains in the instalments remaining after the gain arises. Also, a loss on an asset whose gain is exempt (such as long-term loss where the gain would be exempt) cannot be set off or carried forward.

Key formulas to remember

STCL set-off: STCL → STCG first, then LTCG; Current-year STCL can be set off against any capital gain, short or long term.
LTCL set-off: LTCL → LTCG only; LTCL can never be set off against STCG or any other head of income.
Carry forward period: Up to 8 assessment years after the year of loss; Needs a return filed on or before the due date under section 139(1).
Carried-forward character: STCL → STCG or LTCG; LTCL → LTCG only; A loss keeps its short- or long-term nature when carried forward.
Order of use: Current-year loss set-off first, then brought-forward loss; Brought-forward losses are used against gains remaining after current-year set-off, oldest loss first.
Net gain: Net gain = Gains − losses set off − brought-forward losses used; Apply the rate for each type of gain only on the net amount of that type.
Tax-loss harvesting effect: New cost after rebuy = Rebuy price; Booking the loss lowers tax now but raises the future gain, so tax is deferred.

How to solve Set-off, Carry Forward of Capital Losses and Advance Tax questions

Use the same sequence for any question on loss set-off, carry forward or advance tax.

1List every gain and loss and label each as STCG, LTCG, STCL or LTCL.
2Set off current-year losses within the same type first: STCL against STCG, LTCL against LTCG.
3Set off any remaining STCL against LTCG. Remaining LTCL cannot go against STCG.
4Then apply brought-forward losses by type, using the same rules and the oldest first.
5Compute net STCG and net LTCG. Apply the applicable tax rates only to these net figures.
6Compute carry forward: unabsorbed STCL and LTCL, with the years left out of 8.
7Check whether the return was filed by the due date. If not, no carry forward is allowed.
8For advance tax, check which instalments remain after the gain arose.

Quickest way: Three-bucket check

When to use it: Use for numerical MCQs with several gains and losses in one year.

Draw three lines: STCG, LTCG, losses.
Cancel STCL against STCG first. Use leftover STCL against LTCG.
Cancel LTCL against LTCG only.
Whatever remains on each side is the net gain or carry-forward loss.
Scan the options for a loss that crosses the wrong way, such as LTCL against STCG, and reject it.

Common mistakes in Set-off, Carry Forward of Capital Losses and Advance Tax

Setting off LTCL against STCG
Students assume any loss can reduce any gain.
Fix: Remember the one-way rule: LTCL only against LTCG.
Setting off capital loss against salary or business income
Confusion with other heads where inter-head set-off is allowed.
Fix: Capital losses stay within the capital gains head.
Thinking carry forward is 4 years or unlimited
Mixing with other loss rules.
Fix: Capital losses carry forward for 8 assessment years.
Ignoring the due-date condition
Focusing only on the arithmetic.
Fix: Loss carry forward needs the return filed by the due date under section 139(1).
Assuming harvesting removes tax permanently
The loss reduces this year's tax, so it looks like a saving.
Fix: Rebuying at a lower price raises the future gain. It is a deferral.
Treating a carried-forward STCL as if it became long term
Time has passed, so students assume the nature changes.
Fix: A loss keeps its original character when carried forward.

Worked examples

Example 1

In a year, Rohan has STCG of ₹40,000, LTCG of ₹1,00,000, STCL of ₹70,000 and LTCL of ₹30,000. Find net STCG and net LTCG.

Show the solution

Set off STCL against STCG: ₹40,000 − ₹40,000 = nil. STCL left: ₹30,000.
Set off remaining STCL against LTCG: ₹1,00,000 − ₹30,000 = ₹70,000.
Set off LTCL against LTCG: ₹70,000 − ₹30,000 = ₹40,000.
Net STCG is nil and net LTCG is ₹40,000. No loss is carried forward.

Answer: Net STCG nil; net LTCG ₹40,000; no carry forward.

Example 2

Meera has LTCL of ₹80,000 and STCG of ₹50,000 this year. She files her return on time. What is her taxable STCG and what loss is carried forward?

Show the solution

LTCL can be set off only against LTCG. She has no LTCG.
So STCG of ₹50,000 stays fully taxable.
The whole LTCL of ₹80,000 is unabsorbed.
As the return was filed on time, it is carried forward for up to 8 assessment years, to be set off only against LTCG.

Answer: Taxable STCG ₹50,000; LTCL of ₹80,000 carried forward against future LTCG only.

Exam tips

Memorise the one-way rule: STCL can reduce both gains, LTCL only LTCG. Many MCQs test just this.
If an option says capital loss is set off against salary or other income, reject it.
Look for the words 'return filed after due date' in the question stem. They signal no carry forward.
In numerical questions, always use STCL on STCG first, then on LTCG, then LTCL on LTCG.
For harvesting questions, pick the option describing tax deferral, not tax elimination.

Practice questions from Capital Gains

Set-off, Carry Forward of Capital Losses and Advance Tax in other exams

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

Set-off, Carry Forward of Capital Losses and Advance Tax: frequently asked questions

For how many years can capital losses be carried forward?

Capital losses can be carried forward for 8 assessment years after the year in which the loss arose. You must file the return by the due date to claim this.

What is the difference between STCL and LTCL set-off?

STCL can be set off against both short-term and long-term capital gains. LTCL can be set off only against long-term capital gains.

What is tax-loss harvesting in India?

It means selling investments at a loss before year-end to set the loss off against gains and lower tax. You can reinvest afterwards, but the lower cost means a higher gain later, so it only defers tax.

Is advance tax payable on capital gains?

Yes. If your total tax liability crosses the advance tax threshold, tax on gains is payable through advance tax. Gains arising late in the year are paid in the remaining instalments.