Can I set off short-term capital loss against long-term capital gains in India?

Yes. In India, a Short-Term Capital Loss (STCL) can be set off against both Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) in the same financial year. This is more flexible than a Long-Term Capital Loss (LTCL), which can only be set off against Long-Term Capital Gains (LTCG). This means a loss from a stock held for less than 12 months (STCL) can reduce your LTCG tax liability on equity gains.

For how many years can capital loss be carried forward in India?

Capital losses that cannot be fully set off against gains in the current financial year can be carried forward for up to 8 assessment years (financial years). For example, if you incur a loss in FY 2025-26 and cannot set it off, you can carry it forward to offset capital gains up to FY 2033-34. However, to carry forward capital losses, you must file your Income Tax Return (ITR) on or before the due date. Losses are not allowed to be carried forward if you miss the ITR filing deadline.

Is there a wash sale rule in India like in the US?

No. India has no wash sale rule. In the US, if you sell a security at a loss and repurchase the same or substantially identical security within 30 days, the loss is disallowed. In India, there is no such restriction. You can sell a mutual fund or stock at a loss to harvest the capital loss for tax purposes, and immediately (even the same day) repurchase the same fund or stock. This makes tax loss harvesting in India significantly more straightforward than in the US.

Can capital loss be set off against salary or business income?

No. Capital losses (both short-term and long-term) can only be set off against capital gains income. They cannot be set off against salary income, business income, house property income, or any other head of income. This is one of the key limitations of tax loss harvesting - it is only useful if you have capital gains to offset, either in the current year or in future years (carry forward).

How does the annual LTCG exemption of ₹1.25 lakh work with tax loss harvesting?

The ₹1.25 lakh annual LTCG exemption applies to net LTCG after setting off any LTCL. For example, if you have LTCG of ₹2 lakh and LTCL of ₹50,000, the net LTCG is ₹1.5 lakh. After applying the ₹1.25 lakh exemption, taxable LTCG = ₹25,000, taxed at 12.5% = ₹3,125. Tax loss harvesting can help reduce LTCG to within the ₹1.25 lakh exemption limit, effectively making your entire gains tax-free for that year.

Tax Loss Harvesting in India 2026 - How to Offset Capital Gains and Save Tax

Written by Tushar Ray | Updated: April 2026 | 10 min read

Tax loss harvesting is one of the most underutilised tax-saving strategies in India. It involves deliberately selling investments that are currently at a loss to generate a capital loss, which can then be used to offset capital gains - reducing your overall tax liability. Unlike the US, India has no wash sale rule, making this technique particularly powerful and flexible. This guide explains the rules, limitations, and practical examples.

How Capital Loss Set-Off Works in India

The Income Tax Act allows you to set off capital losses against capital gains in the same financial year. The rules are hierarchical:

Short-Term Capital Loss (STCL) can be set off against both STCG and LTCG (from any asset type).
Long-Term Capital Loss (LTCL) can only be set off against LTCG. It cannot be set off against STCG.
Capital losses (whether STCL or LTCL) cannot be set off against income from salary, business, house property, or other income sources.

The set-off happens automatically within the same head of income (Capital Gains) when you file your ITR. You do not need to make any additional declaration - just correctly report all capital transactions.

Set-Off Rules: Complete Matrix

Loss Type	Can Set Off Against STCG?	Can Set Off Against LTCG?	Can Set Off Against Salary/Business?
Short-Term Capital Loss (STCL)	Yes	Yes	No
Long-Term Capital Loss (LTCL)	No	Yes	No

Carry Forward: Using Losses Over Multiple Years

If you cannot fully use a capital loss in the year it arises (because your gains are not high enough), you can carry it forward for up to 8 assessment years to offset against future capital gains.

Critical condition: You must file your ITR on or before the due date (typically July 31 for salaried individuals, October 31 for those requiring audit). If you miss the deadline, you lose the right to carry forward the loss. This is one of the most important reasons to file your ITR on time, even if you have no tax due.

Example: You incur an STCL of ₹3 lakh in FY 2025-26 but have no capital gains that year. You file ITR before July 31, 2026, and report the loss. In FY 2026-27, you have STCG of ₹2 lakh and LTCG of ₹2 lakh. You use the carried-forward STCL: ₹2 lakh STCL against STCG → STCG becomes zero. Balance ₹1 lakh STCL against LTCG → LTCG becomes ₹1 lakh. This ₹1 lakh LTCG is within the ₹1.25 lakh exemption → net tax = zero. Effectively, you saved ₹40,000+ in tax across two years.

No Wash Sale Rule: India's Advantage

In the United States, the wash sale rule prevents investors from claiming a tax loss if they repurchase the same or substantially identical security within 30 days before or after the sale. India has no such rule.

This means you can:

Sell a mutual fund unit at a loss to book the capital loss.
Immediately repurchase the same mutual fund (or a similar one) at the current NAV.
Continue your investment at the new lower cost basis while having legally recorded a capital loss for tax purposes.

This strategy is completely legal under Indian income tax law. It is routinely used by aggressive tax planners toward the end of each financial year (January–March) to harvest losses before March 31.

Practical Example: Tax Loss Harvesting to Stay Within the ₹1.25 Lakh LTCG Exemption

Consider a mid-year portfolio review revealing the following:

Investment	Unrealised Gain/(Loss)	Type	Action
Nifty 50 Index Fund (held 18 months)	+₹2,00,000	LTCG	Plan to redeem
Sector Fund - IT (held 15 months)	−₹75,000	LTCL	Harvest loss before Mar 31
Equity Stock A (held 8 months)	−₹40,000	STCL	Harvest loss before Mar 31

Without harvesting: Net LTCG = ₹2 lakh. Taxable LTCG (after ₹1.25L exemption) = ₹75,000. Tax at 12.5% = ₹9,375 (+cess).

With harvesting: Sell sector fund (LTCL ₹75,000) and Stock A (STCL ₹40,000). Net LTCG = ₹2 lakh − ₹75,000 (LTCL) − ₹40,000 (STCL) = ₹85,000. This is below the ₹1.25 lakh exemption → Tax = ₹0. After harvesting, repurchase the same sector fund immediately at current NAV. You remain invested, but tax saved = ₹9,375 (or more if continued in higher-gain years).

Limitations and Practical Considerations

Exit loads: Many mutual funds charge an exit load (typically 1% if redeemed before 1 year). Selling just to harvest a loss incurs this cost. Ensure the tax saving exceeds the exit load.
Transaction costs: Brokerage, STT, and stamp duty apply on equity transactions. Factor these in.
Year-end timing: Trades must be executed before March 31 (the last day of the Indian financial year) for the loss to count in that year. Settlement takes T+1 for mutual funds and T+1 for equities on NSE/BSE.
Only capital losses vs capital gains: Cannot offset against other income.
ITR filing is mandatory to carry forward: Do not miss the July 31 due date if you want to carry forward losses.

Related Resources

Disclaimer: This guide is for educational purposes only. Tax loss harvesting is a legitimate tax planning strategy, not tax evasion. Capital gains classification and set-off rules are based on FY 2025-26 provisions. Consult a chartered accountant before executing tax loss harvesting trades, especially near financial year end.

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