Why Capital Loss Rules Matter More in FY 2025-26
With STCG tax raised to 20% and LTCG tax at 12.5% (Finance Act 2024, effective 23 July 2024), correctly tracking and applying capital losses can save clients significant tax money. A CA who misses a carry-forward loss from a prior year, or incorrectly sets off a long-term loss against short-term gains, is leaving money on the table — or worse, exposing the client to scrutiny.
This guide covers the complete set-off and carry-forward framework under the Income Tax Act, including the most common errors CAs make during ITR filing.
The Two Types of Capital Loss
Capital losses from equity assets arise in two forms, with different rules for each:
- Short-Term Capital Loss (STCL): Loss on sale of assets held for 12 months or less (for listed equity shares and equity MFs).
- Long-Term Capital Loss (LTCL): Loss on sale of assets held for more than 12 months. Note: LTCL from equity shares and equity MFs was not recognised before FY 2018-19 (when LTCG was fully exempt). LTCL is deductible only from FY 2018-19 onwards.
Set-Off Rules: Same Financial Year
The first step is intra-year set-off — using losses from one asset against gains from another within the same FY. The rules are asymmetric:
| Loss Type | Can Set Off Against | Cannot Set Off Against |
|---|---|---|
| Short-Term Capital Loss (STCL) | STCG and LTCG (any asset) | Salary, business income, IFOS, speculative income |
| Long-Term Capital Loss (LTCL) | LTCG only (any asset) | STCG, salary, business income, IFOS, speculative income |
The critical asymmetry: STCL can offset both STCG and LTCG, but LTCL can only offset LTCG. This frequently surprises clients who have large LTCG from equity but only LTCL to set off — and wonder why their STCG is still fully taxable.
Intra-Head vs Inter-Head Set-Off
Capital losses — both short-term and long-term — are intra-head losses. They can only be set off against other capital gains. They cannot be set off against salary, business income, or income from other sources.
This is unlike business losses (non-speculative), which can be set off against any income except salary under Section 71.
Worked Example: Same-Year Set-Off (FY 2025-26)
Suppose a client has the following in FY 2025-26:
- STCG from Zerodha trades: ₹3.5 lakh
- LTCG from Groww trades: ₹2.2 lakh
- LTCL from Angel One trades: ₹1.8 lakh
- STCL from Upstox trades: ₹1.2 lakh
Step 1 — Set off STCL against STCG and LTCG (STCL is more flexible):
- STCG after STCL offset: ₹3.5L − ₹1.2L = ₹2.3 lakh net STCG
Step 2 — Set off LTCL against LTCG only:
- LTCG after LTCL offset: ₹2.2L − ₹1.8L = ₹0.4 lakh net LTCG
Step 3 — Apply ₹1.25 lakh exemption on LTCG (Section 112A):
- ₹0.4 lakh < ₹1.25 lakh → Zero LTCG tax
Final tax: 20% on ₹2.3 lakh STCG = ₹46,000 STCG tax + 4% cess.
Carry Forward: The 8-Year Rule
If capital losses are not fully absorbed in the same FY, they can be carried forward. The rules:
| Loss Type | Carry-Forward Period | Set-Off in Future Years |
|---|---|---|
| Short-Term Capital Loss (STCL) | 8 assessment years | Against STCG and LTCG |
| Long-Term Capital Loss (LTCL) | 8 assessment years | Against LTCG only |
| Speculative business loss (intraday) | 4 assessment years | Against speculative income only |
| Non-speculative business loss (F&O) | 8 assessment years | Against non-speculative business income |
Example: A client with ₹5 lakh LTCL in FY 2025-26 (AY 2026-27) can carry it forward until AY 2034-35 — but only to set off against future LTCG, not STCG.
The Critical Deadline: File ITR Before the Due Date
This is where CAs must be especially careful. Under Section 80 of the Income Tax Act: capital losses can only be carried forward if the ITR is filed on or before the due date.
- For individuals without tax audit: 31 July (AY 2026-27 for FY 2025-26)
- For tax audit cases: 31 October
A belated return (filed after the due date under Section 139(4)) cannot carry forward capital losses. The loss is permanently forfeited — there is no remedy after the fact.
This rule does not apply to losses brought forward from prior years — those can be claimed even in a belated return. The restriction only applies to current-year losses being carried forward.
Practical implication: if a client mentions large losses in August and wants to file the ITR late "to save time," advise them explicitly that doing so forfeits their carry-forward rights for the current year's losses.
How to Report Carry-Forward Losses in ITR
Capital loss carry-forward involves two schedules in ITR-2 and ITR-3:
Schedule CFL (Carry Forward of Losses)
This schedule records the losses being carried forward from the current year. It shows the loss amount by head (STCL from different asset types, LTCL) and the AY they originated in. These will be available for set-off in future years.
Schedule BFLA (Brought Forward Loss Adjustment)
This schedule records losses brought forward from prior years and their set-off against current year's capital gains. For each carried-forward loss (from the prior year's Schedule CFL), the set-off is shown year by year.
The order of set-off matters: current-year losses are set off first before brought-forward losses. Within brought-forward losses, the oldest year's losses are used first (first-in, first-out).
Reconciling Carry-Forward Losses with AIS
The Annual Information Statement (AIS) now includes capital gains as reported by depositories. However, AIS does not show carry-forward losses — it only shows transaction-level data. The carry-forward loss record comes solely from the prior year's filed ITR.
For clients who switched CAs, verify the prior years' ITRs for any Schedule CFL entries. Losses from up to 8 prior assessment years can be available for set-off — they are often missed when client files are transferred.
Reconciliation checklist:
- Match current-year capital gains in AIS with broker P&L statements — resolve discrepancies before filing
- Pull Schedule CFL from the prior year's filed ITR acknowledgment (available on the IT portal under filed returns)
- Enter brought-forward losses correctly in Schedule BFLA — the portal pre-fills some data from prior year, but always verify
Special Situations
Client Changed Broker Mid-Year
If a client transferred shares from one broker to another (inter-depository transfer), no sale occurs — it is not a capital gain or loss event. Only when shares are actually sold does the gain/loss crystallise. Ensure the client did not confuse a broker transfer with a sale.
Corporate Actions: Bonus, Split, Rights
Bonus shares have zero cost of acquisition. When bonus shares are sold at a loss, the STCL or LTCL is based on the full sale proceeds being the loss (since cost = zero). Broker P&L statements may handle this differently — always verify cost basis for bonus shares manually.
Losses from Delisted or Suspended Stocks
A loss on a delisted stock becomes final only when the shares are sold or the company is officially wound up. Merely holding a stock that has become worthless does not trigger a deductible loss — the sale or disposition must have occurred within the FY.
Intraday Equity Losses vs Capital Losses
Intraday equity losses are speculative business losses under Section 43(5), not capital losses. They cannot be set off against capital gains — only against speculative income. They also have a shorter carry-forward window of 4 years. Do not mix intraday losses with delivery-based capital losses when filling Schedules BFLA and CFL.
Common Mistakes CAs Make
- Setting off LTCL against STCG: Not permitted. LTCL can only offset LTCG. A client with ₹5 lakh LTCL and ₹3 lakh STCG (and no LTCG) still pays full tax on the STCG.
- Missing carry-forward from prior years: If the prior year's return was filed showing losses in Schedule CFL, those must be brought into the current year's Schedule BFLA. The IT portal pre-fills some data but verify manually.
- Belated return for loss-heavy clients: Filing after the due date forfeits the carry-forward right for current-year losses. Clients with large losses should be prioritised for early filing.
- Mixing capital losses with business losses: F&O losses are non-speculative business losses, not capital losses. They follow different set-off and carry-forward rules. Do not enter F&O losses in Schedule CFL capital gains section.
- Not using FIFO for cost basis: The Income Tax Act mandates FIFO for equity shares. If a client's shares were partially sold, the cost of the sold shares is determined by which lots were purchased first. Using average cost (VWAP) or LIFO gives wrong loss figures.
- Ignoring ₹1.25 lakh LTCG exemption interaction: The exemption applies to the net LTCG after set-off of LTCL. If a client has ₹2 lakh LTCG and ₹1 lakh LTCL, net LTCG is ₹1 lakh — which is below the ₹1.25 lakh exemption, so no LTCG tax. Applying the exemption before set-off would give a wrong result.
How FirstReports Helps
When a client has traded on multiple brokers in the same year, computing the correct net STCG, net LTCG, and losses requires consolidating all trades into a single ledger before applying set-off rules. FirstReports merges P&L statements from Zerodha, Groww, Angel One, Upstox, and other brokers into a unified trade log. It applies FIFO cost accounting across all brokers, classifies each trade as STCG, LTCG, Intraday, or F&O, and outputs a consolidated gains summary — with net STCG and LTCG figures ready for entry into Schedule CG, BFLA, and CFL in ITR-2 or ITR-3.