NISM-Series-X-B: Investment Adviser (Level 2) · Taxation of Equity Products

Set-off and Carry Forward of Capital Losses: STCL and LTCL Rules

Updated 11 October 2026 · Fact-checked

A capital loss is first set off against gains in the same year. Short-term capital loss (STCL) can be set off against both short-term and long-term gains. Long-term capital loss (LTCL) can be set off only against long-term gains. Unabsorbed losses are carried forward for 8 assessment years, if the return is filed on time.

Understand Set-off and Carry Forward of Capital Losses

A capital loss arises when you sell a capital asset, such as listed shares or equity mutual fund units, for less than its cost. Tax law does not let you ignore it. It lets you use the loss to reduce taxable capital gains, so you pay tax on the net gain only.

The law splits capital gains into two baskets: short-term and long-term. Each basket has its own loss. The key asymmetry is this: STCL is flexible, LTCL is restricted. STCL can reduce any capital gain. LTCL can reduce only long-term gains.

This restriction is a statutory rule under Section 70 of the Income-tax Act. Just learn it as a rule: LTCL goes only against LTCG.

Set-off happens in two stages. First, intra-head set-off: you net losses against gains within the head Capital Gains in the same year. Second, carry forward: any loss still left is carried forward to later years. STCL carried forward can be set off against both STCG and LTCG of later years. LTCL carried forward can be set off only against LTCG.

Carry forward has conditions. The loss must be computed and reported in a return filed on or before the due date. A loss carried forward can be used for a maximum of 8 assessment years after the year in which it arose. A capital loss cannot be set off against salary, business income or other heads. Only capital gains can absorb it. Note also that a capital loss can be carried forward only; you cannot carry it back to earlier years.

Key formulas to remember

STCL set-off: STCL → STCG first, then LTCG; STCL can be set off against both short-term and long-term capital gains of the same year.
LTCL set-off: LTCL → LTCG only; LTCL cannot be set off against short-term capital gains.
Carry forward period: Up to 8 assessment years after the year of loss; Counted from the assessment year following the year the loss arose.
Nature retained: STCL carried forward remains STCL; LTCL carried forward remains LTCL; Carried forward STCL can be set off against STCG or LTCG; carried forward LTCL only against LTCG.
Filing condition: Return filed on or before the due date; Needed to carry forward a capital loss. Late return generally means the loss cannot be carried forward.
Head restriction: Capital loss ≠ set off against other heads; Salary, business and other income cannot absorb a capital loss.
Net taxable gain: Net gain = Gains − eligible losses (after set-off); Exemption limit and special rates are applied after set-off.

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

Use this order for any question on set-off or carry forward of capital losses.

1List every item for the year as STCG, STCL, LTCG or LTCL. Check the holding period to classify it.
2Set off STCL against STCG first.
3If STCL is left over, set it off against LTCG.
4Set off LTCL only against LTCG. Never against STCG.
5Work out the remaining net STCG and net LTCG. Apply the question's rates or exemption only after this.
6Whatever loss is left is carried forward, keeping its short-term or long-term nature.
7Check conditions: return filed on time, and the loss is within 8 assessment years.
8If the question asks about future years, apply the carried forward loss using the same rules.

Quickest way: Basket rule for capital losses

When to use it: Use it for MCQs that give a few gains and losses and ask for net gain, loss carried forward or what can be set off.

Remember one line: STCL can go anywhere in capital gains; LTCL can go only to LTCG.
Follow the standard order: set off STCL against STCG first, then any balance of STCL against LTCG. Set off LTCL only against LTCG.
Scan the options for traps: 'LTCL against STCG', 'carry forward 4 years', 'set off against salary'. Eliminate them.
Any leftover loss is carried forward for up to 8 years if the return was filed on time.

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

Setting off LTCL against STCG.
Students assume all capital losses behave alike.
Fix: Repeat: LTCL only against LTCG. STCL is the flexible one.
Saying capital losses are carried forward for 4 years.
Confusion with the 4-year carry-forward period for speculative business loss, or with old rules.
Fix: For capital losses the period is 8 assessment years.
Setting off a capital loss against salary or business income.
Mixing up intra-head and inter-head set-off.
Fix: Capital losses can only reduce capital gains. They cannot reduce other heads.
Assuming loss can be carried forward even if the return is filed late.
Students focus on the loss amount and forget the filing condition.
Fix: Carry forward needs a return filed on or before the due date.
Applying the exemption limit before set-off.
Students jump to the tax computation too early.
Fix: Set off losses first, then apply the exemption limit and special rate to the net gain.
Treating carried forward STCL as long-term, or the reverse.
Forgetting that the loss keeps its original character.
Fix: STCL stays STCL and LTCL stays LTCL in the carry forward years.

Worked examples

Example 1

In a year, Mr. Rao has STCG of ₹40,000 on listed shares, STCL of ₹70,000 and LTCG of ₹1,00,000 on equity shares. What is the loss or gain left after set-off, ignoring the exemption limit?

Show the solution

Set off STCL against STCG: ₹70,000 − ₹40,000 = ₹30,000 of STCL left. Net STCG is nil.
Set off the remaining STCL against LTCG: ₹1,00,000 − ₹30,000 = ₹70,000.
No loss remains to be carried forward.

Answer: Net STCG is nil and net LTCG is ₹70,000. Nothing is carried forward.

Example 2

Ms. Iyer has LTCL of ₹90,000 and STCG of ₹60,000 in a year, and no other capital gains. What can she do with the loss?

Show the solution

LTCL can be set off only against LTCG. She has no LTCG this year.
LTCL cannot be set off against the STCG of ₹60,000, so STCG of ₹60,000 stays taxable.
The entire LTCL of ₹90,000 is carried forward, remaining long-term in nature.
It can be set off against LTCG in the next 8 assessment years, provided she files her return on time.

Answer: No set-off this year. The LTCL of ₹90,000 is carried forward for up to 8 assessment years against LTCG only, and the STCG of ₹60,000 is fully taxable.

Exam tips

Expect direct questions: which loss can be set off against which gain. Memorise STCL → both, LTCL → LTCG only.
Know the number 8 for carry forward of capital losses and the on-time return condition.
In numerical questions, classify gains and losses first, then set off, then apply rates or exemption.
Watch the wording 'carried forward' versus 'set off against other income'. Capital loss cannot be set off against other heads.
In the Level 2 paper, caselets may combine several trades. Make a small table of STCG, STCL, LTCG and LTCL before answering.

Practice questions from Taxation of Equity Products

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

For how many years can a capital loss on shares be carried forward?

A capital loss can be carried forward for up to 8 assessment years after the year in which it arose. You must have filed the return for the loss year on or before the due date.

Can STCL be set off against LTCG?

Yes. Short-term capital loss can be set off against both short-term and long-term capital gains. It is usually used against STCG first, and any balance is set off against LTCG.

Can LTCL be set off against STCG?

No. Long-term capital loss can be set off only against long-term capital gains. If there are no LTCG, it is carried forward.

How do I carry forward a capital loss in the ITR?

Report the loss in the capital gains schedule and the carry forward schedule of the return, and file the return on or before the due date. The reported loss is then available against future gains.