What Is Capital Loss?
A capital loss occurs when you sell a capital asset — such as shares, mutual fund units, or property — for less than its purchase price. In the Indian equity context, if you buy a stock at ₹500 and sell at ₹350, you incur a capital loss of ₹150 per share.
Formula:
Capital Loss = Cost of Acquisition − Sale Price
Capital losses are not merely unfortunate outcomes; strategically, they can be used to reduce your tax liability through set-off and carry-forward provisions under the Income Tax Act, 1961.
Types of Capital Loss
Like capital gains, capital losses are classified based on the holding period:
- Short-Term Capital Loss (STCL): Asset held for less than 12 months (for equities)
- Long-Term Capital Loss (LTCL): Asset held for 12 months or more (for equities)
Set-Off Rules for Capital Losses in India
The Income Tax Act specifies strict rules on which losses can offset which gains:
| Loss Type | Can Be Set Off Against |
|---|---|
| Short-Term Capital Loss (STCL) | Both STCG and LTCG |
| Long-Term Capital Loss (LTCL) | Only LTCG (not STCG) |
| Speculative Loss | Only Speculative Gain |
Key rule: Capital losses cannot be set off against salary, business income, or interest income.
Carry-Forward of Capital Losses
If capital losses cannot be fully absorbed in the same financial year, they can be carried forward for up to 8 assessment years:
- Condition: You must file your ITR before the due date (usually 31 July) to carry forward losses
- LTCL Reintroduced: Since Budget 2018 reintroduced LTCG on equities, LTCL from equity can now be carried forward and set off against future LTCG on equity
Tax-Loss Harvesting — A Strategic Use of Capital Loss
Tax-loss harvesting is the deliberate practice of selling loss-making positions near financial year-end (March) to book losses that offset gains elsewhere in your portfolio:
Example:
- You have LTCG of ₹1,80,000 from selling HDFC Bank shares
- You also hold Vodafone Idea shares at a loss of ₹60,000
- Selling the Vodafone shares realises a capital loss of ₹60,000
- Net taxable LTCG: ₹1,80,000 − ₹60,000 = ₹1,20,000 (below ₹1.25 lakh exemption = zero tax)
⚠️ Wash Sale Rule: India has no formal wash-sale restriction, so you can repurchase the same stock immediately after selling. However, do this only if the investment thesis is unchanged.
Practical Tips for Indian Investors
- Review portfolio in February–March — Identify unrealised losses that could usefully be booked before financial year-end
- Don't let the tax tail wag the investment dog — Only harvest losses if the position is fundamentally weak
- Track purchase dates carefully — The STCL vs. LTCL distinction significantly impacts set-off flexibility
- Use a tax consultant — Complex portfolios with multiple instruments need professional tax planning
FAQ
Q: Can I set off equity capital loss against FD interest income? A: No. Capital losses can only be set off against capital gains, not ordinary income like interest or salary.
Q: What if I forget to file ITR before the due date — can I still carry forward losses? A: No. Capital losses can only be carried forward if you file your return before the due date. A belated return does not preserve carry-forward rights.
Q: Is loss on equity mutual fund redemption treated as capital loss? A: Yes. Equity mutual fund units are treated like listed equity shares — losses are classified as STCL or LTCL based on the holding period (12-month threshold).
Disclaimer
This content is for educational and informational purposes only and does not constitute SEBI-registered investment advice. Always consult a qualified financial advisor before making investment decisions. Past performance is not indicative of future results.