Setting Off Capital Gains & Losses — Practical Examples
Tax law lets a capital loss on mutual fund units be set off against capital gains and, if unused, carried forward. This lesson explains which loss can meet which gain, the eight-year carry-forward and its filing condition, as of October 2026.
What set-off means
When units are sold for less than they cost, the result is a capital loss. Like a gain, a loss is short-term or long-term according to how long the units were held and the group of funds they belong to.
Set-off means deducting a loss from a gain before tax is worked out, so that tax is charged on the net figure. The law lays down which pairings are permitted. This lesson describes those rules as they apply to sales that have taken place; it is not a plan for when to sell.
Which loss meets which gain
A short-term capital loss is the more flexible kind: it may be set off against short-term or long-term capital gains. A long-term capital loss may be set off only against long-term capital gains.
Neither kind can be set off against salary or any other head of income. A capital loss stays within capital gains.
Carrying a loss forward
A loss that cannot be absorbed in the year it arises may be carried forward for eight tax years after that year and set off against eligible capital gains in those years.
There is a condition: the income-tax return for the year of the loss has to be filed on or before its due date. If the return is late, the loss can still be set off against gains of the same year, but it is not carried forward.
The Income-tax Act, 2025, in force from 1 April 2026, counts in tax years where older material says assessment years.
How it fits with the other rules
The ₹1.25 lakh yearly limit on long-term gains from equity-oriented units is applied after losses have been set off: the loss first reduces the gain, and the limit is applied to what remains.
Units are taken as sold first-in-first-out, so a part-redemption is matched against the earliest units bought. Their date and cost decide whether the sale gave a gain or a loss, and whether it is short-term or long-term.
Rules at a glance
A short-term loss and its limits (illustrative)
In one tax year Imran has a short-term capital loss of ₹60,000 on units of a hybrid fund and a long-term capital gain of ₹50,000 on units of a gold fund. He also earns a salary.
The loss is set off against the long-term gain, bringing it to nil and leaving ₹60,000 − ₹50,000 = ₹10,000 of loss. That ₹10,000 cannot be set off against his salary. If he files his return by the due date, it is carried forward for up to eight tax years.
A long-term loss carried into the next year (illustrative)
- Assumed figures, for arithmetic only, all from equity-oriented fund units, with the rules as of October 2026 taken to apply in both years. In year 1 an investor has a long-term capital loss of ₹90,000 and a short-term capital gain of ₹40,000.
- Year 1: the long-term loss cannot be set off against the short-term gain. Tax on the short-term gain = ₹40,000 × 20% = ₹8,000, before surcharge and cess.
- The ₹90,000 loss is carried forward, the return for year 1 having been filed by its due date.
- Year 2: the investor has a long-term capital gain of ₹2,50,000. After set-off: ₹2,50,000 − ₹90,000 = ₹1,60,000.
- After the yearly limit: ₹1,60,000 − ₹1,25,000 = ₹35,000. Tax = ₹35,000 × 12.5% = ₹4,375, before surcharge and cess.
Result. The loss gives no relief in year 1 but reduces the year 2 long-term gain, leaving ₹35,000 taxable and tax of ₹4,375.
Key points
- A short-term capital loss can be set off against both short-term and long-term capital gains.
- A long-term capital loss can be set off only against long-term capital gains.
- Capital losses cannot be set off against salary or other heads of income.
- An unabsorbed capital loss can be carried forward for eight tax years, if the return for the loss year is filed by its due date.
- The ₹1.25 lakh limit on long-term gains from equity-oriented units is applied after losses have been set off.
Common misunderstandings
- A long-term capital loss cannot reduce a short-term gain: it can be set off only against long-term capital gains.
- A loss is not carried forward automatically: the return for the loss year has to be filed by its due date.
- The ₹1.25 lakh limit is not taken off before set-off: losses are set off first and the limit is applied to the balance.
Questions people ask
Can a capital loss reduce tax on salary?
No. It can be set off only against capital gains.
What happens to a loss if the return is filed late?
It can still be set off against capital gains of the same year, but is not carried forward.
In a part-redemption, which units decide whether there is a loss?
The earliest units bought, because units are taken as sold first-in-first-out.
What this lesson relies on
- Income-tax Act, 2025 — provisions on set-off and carry-forward of capital losses; sections 196 and 198 (rates on equity-oriented units)
- Fund-house tax reckoners for financial year 2026-27 (secondary source for rates)
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.