ITR Filing 2026: Save Your Taxes Using Stock Market Losses | Set Off, Carry Forward Rules Explained

Traders often face capital losses while dealing in stocks, real estate, or other assets. This financial year 2025-26, the stock market has seen significant volatility amid Iran war, costlier crude oil and AI-induced IT sell-offs, which adversely affected investors across categories, be it long-term investors or F&O traders. However, the losses can save you income tax as several Income Tax Act provisions allow taxpayers to set off and carry forward capital losses, reducing tax liability during the same year of up to eight years.

As the ITR filing season 2026 is going on with the return utilities likely to be enabled soon, here’s everything you need to know about the set-off and carry forward of capital gains loss and the rules related to them.

Types of Capital Gains and Losses

Under the Income Tax Act, capital gains are classified into two categories:

1. Short-Term Capital Gains (STCG): Gains from the sale of assets like equity shares or equity mutual fund units held for a short duration, typically within 12 months for listed assets and 24 months for unlisted assets. Previously taxed at 15 per cent, the Budget 2024 had increased the STCG tax rate to 20 per cent.

2. Long-Term Capital Gains (LTCG): Gains from assets held for a longer duration, i.e., more than 12 months for listed assets and 24 months for unlisted. The LTCG tax rate is 12.5 per cent after the Union Budget 2024, increased from 10 per cent earlier.

Correspondingly, capital losses are also classified as short-term capital loss (STCL) and long-term capital loss (LTCL).

Importantly, LTCG up to Rs 1.25 lakh in a financial year is exempt from tax.

Set-Off of Capital Losses

Capital losses can be adjusted (set off) against capital gains. For example, if you have suffered a short-term capital loss of Rs 50,000 on equity shares of a company in a financial year and gained a short-term capital gain of Rs 50,000 on another company’s shares. This sets off the STCG with STCL, thus there is no tax liability on the investors. Here are the following rules:

1. Short-Term Capital Loss (STCL) can be set off against both short-term and long-term capital gains in the same financial year.

– Losses can be set off only against the same category of income in the subsequent years, i.e., LTCL against LTCG and STCL against STCG/LTCG.

– The taxpayer must file their income tax return (ITR) on or before the due date under Section 139(1) to claim carry-forward benefits. Late filing leads to the forfeiture of this benefit.

– Loss from House property can be set off against income under any head up to a limit of Rs 2 lakhs.

Understanding Carry Forward Of Losses Through An Example

Suppose an investor incurs a short-term capital loss of Rs 1,00,000 in the financial year 2025-26 but has short-term capital gains of only Rs 40,000. The adjusted Rs 60,000 can be carried forward to the next financial year and adjusted against future gains for up to eight years.

It is important to note that the ITR must be filed within the original deadline in order to carry forward losses.

Rules On Set-Off Of Losses Of One Category With Another Category

According to the FAQs available on the income tax department’s website, following are the rules for inter-head adjustments for FY2025-26:

Loss from speculative business cannot be set off against any other income. However, non-speculative business loss can be set off ​against income from speculative business.

Loss under head ‘Capital gains’ cannot be set off against income under other heads of income.

No loss can be set off against income from winnings from lotteries, crossword puzzles, race including horse race, card game, and any other game of any sort or from gambling or betting of any form or nature.

Loss from the business of owning and maintaining race horses cannot be set off against any other income.

Loss from business specified under section 35AD cannot be set off against any other income (section 35AD​ is applicable in respect of certain specified businesses like setting up a cold chain facility, setting up and operating warehousing facility for storage of agricultural produce, developing and building housing projects, etc.).

Loss from business and profession cannot be set off against income chargeable to tax under the head ‘Salaries’.​