How to set-off Capital Losses on Mutual Funds, Stocks, Property, Gold, Bonds & Debentures?

Investments are subject to risks. All investments carry some degree of risk. Stocks, bonds, mutual funds, real-estate properties, gold, precious metals etc., can lose value, sometimes even all their value.

However, most of us equate RISK  with ‘losses’ directly. We forget the fact that it is only a probability of losing and not actually losing.

We all want to make profits on our investments. No one wants to absorb the losses. What if you actually have to incur a financial loss? There can be times where your investments turn negative value and you have to book losses and move on.

In such circumstances, is there any option to turn these losses into gains? Is it possible to maximize income by properly accounting for losses and lower your tax liability?

In this post, let’s discuss;

  • What is a Capital Asset?
  • What are Financial Assets & Non-financial Assets?
  • What is Capital Loss? What is Capital Gain?
  • What are different Heads of Income?
  • How to set-off Capital losses incurred on sale of Stocks, mutual funds, property, gold etc., against the capital gains?
  • How to carry forward Capital losses?

What are Capital Assets?

Capital asset typically refers to anything the individual owns for personal or investment purposes. It includes all kinds of property, movable or immovable, tangible or intangible, fixed or circulating.

Capital assets are further classified as Financial assets and non-financial assets. Financial assets are intangible and represent the monetary value of a physical item. Stocks (Shares), equity mutual funds are examples of Financial Assets.

A non-financial asset is an asset with a physical value, such as real estate, Gold ornaments, equipment, machinery etc.,

What are Capital Gains & Losses?

The profit or gain (if any) that you make on your Capital Assets when you redeem or sell them is referred to as Capital Gains.

It can be a Short Term Capital Gain (STCG) or a Long Term Capital Gain (LTCG) depending upon the ‘Period of Holding’. The tax that is applicable on these profits/gains is known as ‘Capital Gains Tax’.

Similarly,  the losses (if any) that you make on your Capital Assets when you redeem or sell them is referred to as Capital losses.

It can be a Short Term Capital Loss (STCL) or a Long Term Capital Loss (LTCL) depending upon the ‘Period of Holding’.

Short Term Capital Gain/Loss – (STCG / STCL)

If financial assets like Stocks & Equity mutual funds are held for less than 12 months then an investor will make either Short Term Capital Gain (or) Short Term Capital Loss on that investment.

If a non-financial assets and some Financial assets like Debt Mutual Funds, Gold ETFs etc., are held for less than 36 month, investor will make either Short Term Capital Gain (or) Short Term Capital Loss on that investment.

Long term Capital Gain/Loss – (LTCG / LTCL)

If a financial asset is held for more than 12 months then that asset is treated as Long Term Capital Asset. And the investor will make either Long Term Capital Gain (or) Long Term Capital Loss on that investment.

If a non-financial asset is held for more than 36 months then an investor will make either Long Term Capital Gain (or) Long Term Capital Loss on that investment.

With  effective from FY 2017-18 / AY 2018-19, the Holding period for Long term capital gains for all immovable properties has been reduced to 2 years from 3 years.

How to determine short term long term capital gain capital loss shares Equity Debt mutual funds Property Gold Holding period pic

How to set off Capital Losses?

You as a taxpayer can earn income from salary, house property (rental income), business or profession, capital gains, income from other sources (like interest on FD/RD) etc.,

There cannot be a loss from salary and income from other sources. However, you could suffer losses under other heads of income such as loss from house property, business loss and capital loss.

So, is it possible to set-off capital losses against all these ‘heads of income’>

No. We can not set-off capital losses against the below heads of income;

  • Income from Salary
  • Income from Business or Profession.
  • Income from house property (rental income and not capital gains on sale of property)
  • Other sources of income.

For example : If you make a loss on stock investment, you can not set-off this capital loss against your income from salary.

The capital losses can be set-off against capital gains only.

For example : If you make capital loss on stock investment, you can set-off this loss against capital gains on sale of property (if any).

” Long Term Capital Loss can be set off only against Long Term Capital Gains.”

” Short Term Capital Losses are allowed to be set off against both Long Term Gains and Short Term Gains.”

How to set-off Capital Losses on Stocks & Equity Mutual Funds AY 2024-25 / FY 2023-24?

Below table has the details on capital loss set-off rules on sale of Stocks, Equity Mutual Fund Schemes, listed Debentures & Bonds;Long term capital losses equity mutual funds shares stocks set off carry forward rules budget 2018 2019 pic

For example : If you had made a short term capital loss on Stocks and have a Long term capital gain on Sale of House property in a Financial Year, you can set-off losses on Stock investment against gains on Property.

How to Set-off capital losses on Non-Equity mutual funds & Non-Financial Assets?

Below table has the details on capital loss set-off rules on sale of Property, Debt Mutual Funds (Non-Equity Funds), Gold ornaments, Gold ETFs (Exchange Traded Funds) & unlisted Debentures;how to set off short term capital loss on Property Debt Funds Gold ETF Long term capital loss on Shares Debt Funds pics

For Example : If you have made a Long term loss on Debt Funds and have a LTCG on Equity Funds, you can not set-off the loss, as the LTCG on Stocks/Equity funds is a non-taxable income taxable income (w.e.f 1st April, 2018).

Other Important points:

  • Can I carry forward my Capital Losses to the next Financial Year? Yes. If you can not set-off a capital loss under the same head during the same financial year, you can carry forward such losses to the next financial year and can be set-off against Capital Gains (if any) arising in the next year. A capital loss can be carried forward for 8 years from the end of the financial year in which the loss has been incurred.
  • Do I need to file Income Tax Return to carry forward my Capital Losses? – A capital loss can be carried forward to the next year only if you had declared such losses in your ITR and the tax return is filed before the due date.
  • How to set off Losses from Intra-day trading? – If you have incurred speculative loses by doing Intra-day trading in Stocks, they can only be set off through speculative income and can be carried forward up to four years only.
  • How to set off losses on Futures & Options trading? – Intra-day trading has been defined as ‘Speculative business’ whereas F&O trading is not. Income from trading in F&O (both intraday and overnight) on all the Stock Exchanges can be considered as non-speculative business income. Speculative (Intraday trading in equity) loss can’t be offset with non-speculative (F&O) gains, but speculative gains can be offset with non-speculative losses.
  • If I have a Capital Loss & Capital Gains on various investments, what is the effective way of setting-off my loss? – Kindly note that there is no standard rule that the short-term capital loss has to be first set off against short-term capital gains before being set off against long-term capital gains. So, you need to look at the applicable tax rate on various Capital Gains and try to set-off your capital loss against the capital gain which has the lowest tax rate (also, do consider your income tax slab rate).
  • ​If income from any source is exempt, then can loss from such source be adjusted against any other taxable income? – If income from a particular source is exempt from tax, then loss from such source cannot be set off against any other income which is chargeable to tax.  For example : Agricultural income is exempt from tax, hence, if the taxpayer incurs loss from agricultural activity, then such loss cannot be adjusted against any other taxable income.​
  • Can I set off capital loss after receiving dividend from Stocks/Mutual fund Schemes? – To prevent tax avoidance through dividend stripping, capital loss set off is not allowed under Income Tax Act, if investment was made within 3 months of dividend record date or redemption was made within 9 months of the dividend record date.

Continue reading :

(Image courtesy of Stuart Miles at FreeDigitalPhotos.net) (Post published on 23-January-2017)

  • Varun says:

    I have a LTCG on debt mutual funds (A) and LTCL on equity mutual funds (B) where A > B. Can I offset these two? What will be my final tax liability after offset? Will it be 20% of (A-B) ?

  • Kirti Prakash says:

    I have incurred long term capital gain on debt fund (non equity fund ) but after indexation , then there is a long term capital loss. For income tax purpose which figure is to be taken into consideration — is of gain ( without indexation) or loss (with indexation). Please clarify.

    • Sreekanth Reddy says:

      Dear Kirti Prakash,
      You can opt for whichever is beneficial for you. Can set off LTCL against gains..

      • KIRTI PRAKASH says:

        Thanks for the prompt reply. I have still doubt because loss is after indexation but before indexation it is profit. So whether I can set off LTCL after indexation from the debt fund ( non equity ) against profit from LTCG (Equity ). Please explain it in detail.

        • Sreekanth Reddy says:

          Dear KIRTI PRAKASH ,
          Its the NET loss (after indexation calculation)that can be carried forward, so you can …

  • RP says:

    Dear Sir,
    Whereas you have explained nicely the setoff of losses during the current year what about carry forward and adjustement of brough forward losses? Can you kindly explain with examples under different scenarios after 2018 when new law has come? Thanks.

    • Sreekanth Reddy says:

      Dear RP,
      ITR forms like ITR-2 and ITR-3 forms have been amended and updated to accommodate the changes, according to CBDT. You need to disclose the aggregate LTCG or LTCL in the specified columns and spaces provided in these ITR forms.

  • RP says:

    Dear Sir,
    Isn’t the section and rules mentioned by you for equity shares whether short term or long term applicable only if stt is paid? eg if sells equity listed shares offmarket stt would not be paid how would the rules & definitions or category change? Can you kindly elaborate? Thanks.

    • Sreekanth Reddy says:

      Dear RP,
      Yes, the above set off rules (for Equity oriented securities) are applicable if STT is paid.

      Regarding off market transactions and tax implications, you may kindly consult a CA.

  • S.+Garg says:

    Dear Sreekanth,

    I am an investor and trade in equity & F&O.
    I understand that for turnover less than 2cr, the gain should be shown as 6% of this turnover to avoid tax audit.

    1. I wanted to know that for checking applicability of tax audit, what does the “turnover” comprise of – Intra-day and F&O?

    2. So, if have 50% of Intra-day turnover as profit but only 1% in F&O, the combined profit of Intraday and F&O should be 6% ? Or does it need to be atleast 6% in each?

    Thanks for your time!
    Regards.

  • S. Garg says:

    Dear Sreekanth,

    I had reported a short term equity loss of 1.35L in FY2016-17. This FY2017-18, even with 1.5L Short term gain in equity, my total income is below exemption limit. So can I carry forward the 2016-17 loss of 1.35L to next financial year FY2018-19 ?

    Thanks for your valuable time!

    Regards,
    S. Garg

  • rajesh agarwal says:

    I had a net Rs 5,000 STCL (some gains – more losses) on debt mutual funds last financial year. I also had a LTCG of Rs 50,000 on equity mutual funds which, anyway, is not taxable.

    Can the STCL(on debt mf) be carried forward to future years or it must be first set off against the above stated LTCG (on equity mf).

    • Sreekanth Reddy says:

      Dear rajesh,
      For FY 2017-18, LTCG on Equity funds is not taxable, at the same-time it can be used to set-off other losses.

      If you can not set-off a capital loss under the same head during the same financial year, you can carry forward such losses to the next financial year and can be set-off against Capital Gains (if any) arising in the next year. A capital loss can be carried forward for 8 years from the end of the financial year in which the loss has been incurred.

      From FY 2018-19, the rules on Mutual Funds (equity funds) have changed, kindly read @ Mutual Funds Capital Gains Taxation Rules FY 2018-19 (AY 2019-20) | Capital Gains Tax Rates Chart

  • Saurabh patel says:

    In table of set off rule of STCG/STCL through equity fund and stock, you mentioned that STCG (equity fund and stocks) can be set off STCL from other asset capital (non-equity fund,gold, property)
    But in next table of set off rule of STCL through property or non-equity fund you mentioned that STCL (non-equity fund,gold,property) can setoff only STCG through asset capital other than equity fund and stocks.

    Don’t you think both statemets are conflicting

  • Ramesh says:

    invested in debt fund annual dividend scheme .,immediately after 15days of my investment i received dividend on that scheme which suffered the dividend distribution tax of 28.85% and this has erroded my principal amount .,now to the worst the scheme is performing very badly and has addede up to my loss ,
    in such a scenario can i redeem all the units and book short term capital loss and can i set of this against my long term capital gain which i have realised by selling my property ,.pl clarify
    thankyou

    • Dear Ramesh,
      Whatever dividen an unitholder recieves, it is net of DDT. That means DDT is not payable by the unit holder but paid by the Fundhouse.

      “The dividend income received by a debt fund unit holder is also tax free. But, the mutual fund company has to pay a dividend distribution tax (DDT) before distributing this dividend income to its Unit-holders. DDT on Debt Mutual Funds is 28.84%.”

      Once the dividend is paid by the fund house, the NAV of that scheme falls to that extent.
      Suppose you hold 1,000 mutual fund units with an NAV of Rs 20 and the fund house declares a dividend of Rs 2 per share. Since the dividend is coming directly from the NAV, the NAV will fall by Rs 2 to Rs 18.

      • Ramesh says:

        Thank you for your prompt reply
        Since the debt scheme is performing badly ., can I come out of the fund and book capital losses., invested in Sep 2017 ., dividend declared on 28th Sep2017 .,redemption to be given in Jan 2018 ., so I have stayed in the fund only for 4months .,
        But as per IT Finance act it says that the loss cannot be set off ., if sold within nine months after the record date fixed for dividend declaration.,
        In my case I am staying only for 4 months ., but mine is a debt scheme and has suffered DDT .,
        Please clarify me as the debt fund is performing very badly ., I further can’t continue in the fund ., by coming out in 4 months., still can I set off the capital losses ., is it allowed by IT .,

        • Dear Ramesh,
          To prevent tax avoidance through dividend stripping, capital loss set off is not allowed under Income Tax Act, if investment was made within 3 months of dividend record date or redemption was made within 9 months of the dividend record date.

  • ButchiReddy B says:

    Dear Srikanth, this FY2017-18, I will have STCG of rs.500000/- in shares. But I incurred STCL of rs.150000 last year. I did not mention that loss in ITR 16-17 for set off to this year 17-18. Can’t I effect that loss in this current ITR?
    —–Yours, ButchiReddy B, Tirupati.

    • Dear Mr Reddy,
      As per Income Tax Act short term loss can be carried forward for 8 successive assessment years commencing from the assessment year in which the loss was computed/incurred.However, the income tax return has to be filed in time by disclosing the loss.
      If the ITR has been processed, kindly check if there is an option to revise your ITR. If so, take help of a CA and revise it by including the losses.

  • Madan says:

    Sir,
    Suppose I have LTCG of Rs.50,000 on one stock and LTCL of Rs.10,000 on another stock during the same year. what would be the figure I need show in EI schedule of ITR-2.
    Would that be Rs,40,000 or Rs,50000,
    thanks

    • Dear Madan,
      The LTCG of Rs 50k has to be reported under EI schedule of ITR.

      • Madan says:

        Thanks Srikanth, So this means Long term capital gains of various stocks have to be added and shown in EI schedule of ITR-2 but not Long term capital losses on various stocks.
        So, LTCL won’t find any mention in ITR-2 even in the form of deduction from the LTCG even if incurred during the same year. thanks once again.

        • Dear Madan,
          Kindly note that LTCG is just reported under EI section.

          The normal assumption is that LTCG on equity mutual funds or shares is tax-exempt (where STT is paid) and at the same time LTCL on these can not set off.
          This assumption is made by many of the CAs/auditors/tax-assessees.

  • Sanjay Kumar Singh says:

    Hi Sreekanth,

    Regarding the Mutual Funds of HDFC and DSP , ICICI and Franklin (Exchange Traded) if they are held for a period more 12 Months then the Capital Gain will be long Term and the same is not taxable. Well my above statement is 100% as per law or there is any deviation in the Law.

    Please give clarity to my above question .

  • Sanjay Kumar Singh says:

    Hi Sreekanth,

    Went through your mails and responses, well you are doing a great job. Guiding the people on the Financial planning and Tax related issues. My question is regarding the sale of Land ( capital asset) post 5 years of Acquisition. It will attract long term Capital Gain Tax @20% , but benefit of indexation is available of Acquisition cost ,development cost , legal cost, travelling cost pertaining to sale.
    But development cost pertaining to boundary wall ,filling cost and motar pump cost. How can it be claimed as the payment was made in cash four year before. Could you please advice or substanciate how to claim the benefit of the expenses on development.

    • Dear Sanjay,
      The onus of justifying the claim for cost of improvement lies with the Tax assessee (in case a scrutiny is raised by the IT dept).
      Legally, a tax assessee is expected to maintain relevant bills to make the claim.
      He/she might have paid in cash, but the bills should be there reflecting the cash payment to respective individuals.

  • Raghavendra Deshpande says:

    I have purchased a flat in Jun 2016 at 45 lakhs and selling it in Oct 2017 at 70 lakhs. This money I want to use it to buy a new flat at 75 lakhs near my place of work. Am I required to pay short term capital gains tax?

  • Prateek says:

    Hello,my Stcl is 10000 and STCG is 86000 so i have to pay tax on only 76000. Is it right ? Bcoz my CA is asking me to pay on 86000. He said i cannot setoff my losses. Both loss and profit figures are from positional equity cash positions. No intraday. Please advise.

  • Kunal says:

    In FY 2016-17 I have Short Term Loss from Shares and Also Short Term Gain from (Intraday) Speculation Income. So Can I Set Off each Others in the FY 2016-17.

    Example:-
    STCL on Shares of Rs. 300,000/-
    STCG on Speculation of Rs. 45,000/-

    So My Net Capital Losses of Rs. 255,000/-

    I the above example treatment Correct..?? Please Explain it….!!

    Thanks in advance.

  • Navin says:

    I have speculation profit and also stcl can I set off short term capital loss against speculation profit. Plz reply

    • Dear Navin.. If you have incurred speculative loses by doing Intra-day trading in Stocks, they can only be set off through speculative income and can be carried forward up to four years only.

  • Joe B says:

    In your article you say that LT capital losses from equities are a dead loss and cannot be offset against any other LT capital gains. Can you recheck that please?
    If you look at the case in this link ( https://goo.gl/LSXU52 ), the tribunal has held that long term capitall losses can be set off against other long term gains, long term capital gains from sale of land in this case. I am assuming this would mean that I can offset my LTC losses fro equities against LTCG from debt mutual funds, gold etc. too. How do I verify if this assumption is correct?

    • Dear Joe,
      The normal assumption is that LTCG on equity mutual funds or shares is tax-exempt (where STT is paid) and at the same time LTCL on these can not set off.
      This assumption is made by many of the CAs/auditors/tax-assessees, as there is no clear cut details on the same.
      However, as pointed out by you, in of a court judgement (Mumbai court tribunal) has given a verdict that a Tax assessee can set off LTCL on shares/Equity MFs with other LTCG on land/Gold/other capital assets.

      As there are conflicting views on this, advisable to consult a CA and in case if one goes by this judgement and files his/her ITR, he may have to be ready to justify and challenge his stand in court of law. (Trying to access one tutorial doc on this topic from the IT website, but their server is not responding…tax filing last day…)

  • H.R. KRISHNAN says:

    Dear Mr. Sreekanth,

    I had a STCL of Rs.5000/- during the FY 2015-16 which was C/F to FY 2016-17/ Suppose if I have a STCG of Rs.3000/- should it be compulsarily adjusted against the above loss because in this current FY after taking into account the above STCG of Rs.3000/- my total income is coming below the taxable limit (after adjusting the deductions under sec 80 C) or shall I adjust the entire STCL of Rs.5000/- during the next FY.

    I had posted the above two days back and I shall be thankful if you kindly reply me.

    Regards

    H. R. Krishnan

  • Prem says:

    Dear SreeKanth,

    I was wondering if you plan to write about IPO, their pros and cons and why one should invest/not invest in?
    Looking forward to hear from you to understand in layman language.

    best

  • Rishika says:

    Great article Sreekanth! you have described all the concepts in very nice way. simply yet thoroughly written and easy to understand. Thanks for sharing.

  • Payal Gupta says:

    Incredible Blog! The way you describe this blog are really nice. This is the good information about this how to set off capital losses on mutual funds, stocks, property, bond etc. Thanks for sharing us.

  • Ramdas Baghel says:

    Bro! your just awesome! Simply the best.

  • ajit dhake says:

    I am An NRI From UAE.My only income in India is rental income which is around 7,50,000Rs per annum. Can u clarify whether i need to pay tax at 30 percent or any deductions are possible.

  • Mohit says:

    Hi Sreekanth

    Thanks for this informative write up. I have been looking for this in a summarised way for a long time. I have a question:
    Can you please guide if I have suffered Short Term Capital Loss in Debt Fund and wish to set off it with Captial Gain in the Debt Funds only, how can I do it in ITR 2 like which section, way to put those numbers, etc

    Just ex:
    a) Amount invested in Debt Fund A 6 months ago: 50k
    Redeemed after 6 months at (Short Term Loss): 45k

    b) Amount invested in Debt Fund B 6 months ago: 50k
    Redeemed after 6 months at (Short Term Gain): 53k

    Thanks

  • >
    Scroll to Top