Which future gains can absorb a capital loss?
A qualifying carried-forward short-term capital loss can be set off against capital gains from either short-term or long-term assets. A carried-forward long-term capital loss can be set off only against gains from long-term capital assets. Neither becomes a deduction from salary or bank interest. For tax year 2026–27, read sections 108, 109, 111 and 121 of the Income-tax Act, 2025 together, rather than relying only on the former section 74 label.
Three stages of the working paper
The Income-tax Act, 2025 as amended by the Finance Act, 2026 applies from 1 April 2026. Section 108(2) governs same-year capital-gain matching; section 109(2) prevents a capital loss being set off against another income head; section 111 governs the eligible residue carried into later years. Start with correctly computed taxable capital gains and losses, then perform matching, and only then establish the carry-forward balance. A fall in an unsold investment’s market price is not automatically a computed capital loss.
Maintain separate schedules for short-term and long-term losses. For each source year show the amount determined, evidence of the qualifying return, subsequent utilisation, remaining balance and last eligible year. Reconcile the schedule with the return and available assessment or processing records. A broker’s portfolio total does not itself establish the tax character, allowable amount or procedural eligibility of a carried-forward loss.
Eight years does not restart after partial use
Section 111(2) allows no more than eight tax years immediately succeeding the tax year for which the loss was first computed. A loss first computed for 2026–27 therefore has a modelled utilisation window from 2027–28 through 2034–35. A partial set-off in an intervening year does not give the unused amount another eight years. Retain the original source year when moving the balance forward.
Where several eligible source years coexist, an oldest-expiring-first working is a useful control, subject to the applicable computation and return treatment. Do not present that administrative convention as a substitute for the statutory matching rules. Long-term losses still require long-term gains even when their expiry is close. A near-expiring loss cannot be moved into a different category simply to use it.
Return eligibility is a separate gate
Under section 121, a loss not determined pursuant to a return filed under section 263(1) cannot be carried forward and set off under section 111(1). Verify the applicable due-date and return requirements and any valid extension or specific relief on the actual facts. Do not assume that merely entering an old loss in a later return validates its origin. Conversely, this carry-forward restriction should not be confused with the separate same-year matching exercise.
Keep special assets, exemptions and legacy balances separate
The examples below concern ordinary, otherwise eligible capital gains and losses. They do not establish a loss for an exempt source or decide special restrictions for virtual digital assets, buybacks or other specially governed transactions. First apply the relevant asset-specific computation. Exemption adjustments and the tax rates on remaining gains also require their own analysis; these examples show set-off amounts, not final tax, surcharge or cess.
For losses arising before 1 April 2026, reconcile the original determination and applicable transition or saving provisions separately. Do not relabel an old assessment year as a new tax-year origin or restart its age. This guide’s dated expiry illustration deliberately uses a loss first computed under the new Act.
Mistakes that change the result
Avoid pooling long-term losses with short-term losses, netting them against non-capital income, retaining expired amounts, using a holding-period label without examining the asset’s applicable rule, and confusing a financial-statement write-down with a realised tax loss. Resolve differences before filing, with the sale documents, cost evidence and source-year records attached to the reconciliation.
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Short-term loss against short-term gain
An eligible brought-forward short-term loss of ₹1,20,000 is matched with ₹90,000 of otherwise eligible short-term gain. Set-off is ₹90,000; remaining short-term loss is ₹30,000, retaining its original expiry.
Illustrative example 2: Short-term loss against long-term gain
An eligible short-term loss brought forward is ₹80,000 and the only eligible gain is long-term gain of ₹1,50,000. Section 111 permits ₹80,000 set-off; remaining long-term gain is ₹70,000. This does not change the loss’s original classification.
Illustrative example 3: Long-term loss cannot absorb a short-term gain
Brought-forward long-term loss is ₹1,00,000; the only capital gain is short-term ₹70,000. Permitted set-off is ₹0. The ₹70,000 gain remains, while ₹1,00,000 stays in its eligible loss register subject to expiry.
Illustrative example 4: Long-term matching and residue
An eligible long-term loss of ₹2,00,000 meets ₹1,30,000 eligible long-term gain. Set-off is ₹1,30,000 and ₹70,000 remains as long-term loss. It cannot be redirected to ₹40,000 salary income also present in the facts.
Illustrative example 5: Source-year age survives utilisation
A ₹3,00,000 loss first computed for 2026–27 has eight succeeding tax years, 2027–28 to 2034–35. After ₹1,00,000 eligible utilisation in 2029–30, the ₹2,00,000 residue still has 2034–35 as its last year under this model, not 2037–38.
Illustrative example 6: Two source-year buckets
Assume two eligible short-term-loss buckets of ₹40,000 and ₹90,000, with the first expiring earlier. Against ₹1,00,000 eligible gains, an oldest-first working uses ₹40,000 plus ₹60,000, leaving ₹30,000 in the second bucket. The working preserves each bucket’s original source year.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Compute asset results | Sale evidence, cost and applicable asset-specific law. |
| 2 | Classify holding character | Short-term/long-term analysis for the actual asset. |
| 3 | Apply current-year matching | Section 108 computation by eligible gain category. |
| 4 | Exclude cross-head set-off | Section 109(2) reconciliation to other income. |
| 5 | Verify source-year eligibility | Return under section 263(1), determination and any relief evidence. |
| 6 | Separate carried losses | Short-term and long-term source-year registers. |
| 7 | Count the eight succeeding years | Original source year and expiry calculation. |
| 8 | Allocate eligible utilisation | Gain-category and source-year audit trail. |
| 9 | Reconcile closing balances | Return schedules, processing records and utilisation history. |
| 10 | Review special/legacy items | Separate asset-specific and transitional legal conclusions. |
Sixteen practitioner FAQs
1. Can a short-term loss meet long-term gains?
An eligible carried short-term capital loss can meet capital gains from another capital asset, including long-term gains, under section 111.
2. Can a long-term loss meet short-term gains?
No. Section 111 limits that carried loss to gains from another long-term capital asset.
3. Can capital losses reduce salary?
No. Section 109(2) prevents set-off against a different head of income.
4. Is bank interest a matching gain?
Ordinary bank interest is not capital gain merely because the money came from an asset sale.
5. Does a portfolio price decline create a carried loss?
Not automatically. Establish a tax-computed loss under the applicable transaction and asset provisions.
6. Where is same-year matching addressed?
Section 108(2); carry-forward of the eligible residue is addressed by section 111.
7. What is the maximum carry period?
Eight tax years immediately succeeding the year for which the loss was first computed, subject to eligibility and other applicable restrictions.
8. Does partial use restart that period?
No. Preserve the original source year and expiry of the remainder.
9. Why keep separate source-year rows?
A single total conceals expiry and makes it difficult to prove that utilisation concerns an eligible, unexpired balance.
10. Is oldest-first allocation the whole legal test?
No. It is a practical expiry control; category matching and the applicable return computation remain necessary.
11. Does a later return validate an unsupported old loss?
No. Verify the source-year return and determination required by section 121.
12. What return provision does section 121 reference?
It references a return filed under section 263(1). Check the applicable due date, valid extensions and any specific relief separately.
13. Do these examples calculate tax payable?
No. They determine eligible set-off and residual amounts; rate, exemption and final-tax calculations follow separately.
14. Can an exempt-source loss be assumed usable?
No. Establish that the loss enters the taxable computation and is not barred by the applicable source-specific law.
15. Can a buyback-loss working be copied into every case?
No. Special transaction rules must be applied first; this guide addresses ordinary eligible capital-loss matching.
16. How should old-Act balances be migrated?
Preserve original years, determinations, utilisation and expiry; verify the applicable transition or saving provisions without resetting the clock.
Conclusion
Keep short-term and long-term capital losses separate. Section 111 permits different gain matching, limits carry-forward to eight succeeding tax years and operates with section 121’s return requirement.