Clipped from: https://www.financialexpress.com/money/income-tax/how-to-carry-forward-stock-market-losses-in-itr-filing-ay-2026-27/4252743/
If your stock market portfolio ended FY 2025-26 in the red, the losses may not be entirely bad news. During ITR filing for AY 2026-27, certain capital losses can actually help reduce your tax liability.
Carried-forward losses can then be offset against eligible capital gains in subsequent years, allowing investors to optimize tax efficiency over time.
If your stock market portfolio ended FY 2025-26 in the red, the losses may not be entirely bad news. During ITR filing for AY 2026-27, certain capital losses can actually help reduce your tax liability.
This strategy, commonly known as tax loss harvesting, allows you to use eligible losses from shares, equity mutual funds, ETFs, and other capital assets to reduce future or current capital gains tax burden.
However, the rules differ for short-term and long-term losses, making correct classification crucial.
Applicability to long-term and short-term capital gains (LTCG & STCG)
Short-Term Capital Gains (STCG)
Equity shares held for 12 months or less fall under STCG, which is taxed at 20% under Section 111A of the Income-tax Act, 1961. Investors can offset short-term capital losses against both STCG and LTCG, providing an effective means to lower taxable gains and optimize tax liability.
Long-Term Capital Gains (LTCG)
Equity shares held for more than 12 months qualify as LTCG. Gains exceeding Rs. 1.25 lakh from the sale of listed equity shares and equity-oriented mutual funds are taxed at 12.5% without indexation benefits. However, long-term capital losses can only be offset against LTCG, reducing the taxable amount.
Under Section 112A, LTCG up to Rs. 1.25 lakh per financial year is exempt from tax. Therefore, before utilizing long-term capital losses, investors should determine whether their LTCG falls within this exemption limit, as gains below this threshold remain non-taxable. This ensures that capital losses are utilized efficiently, maximizing potential tax savings.
Carry-Forward of Capital Losses
If capital losses exceed gains in a given financial year, the unutilized losses can be carried forward for up to 8 years. To claim this benefit, taxpayers must declare the loss in their Income Tax Return (ITR) before the due date.
Carried-forward losses can then be offset against eligible capital gains in subsequent years, allowing investors to optimize tax efficiency over time.
Key Considerations for Tax Loss Harvesting
While short-term capital losses can be offset against both STCG and LTCG, long-term capital losses can only be adjusted against LTCG. Considering this distinction, tax loss harvesting serves as a powerful tool for managing tax liabilities across both short-term and long-term capital gains. By strategically leveraging set-off provisions under the Income-tax Act, investors can significantly optimize tax efficiency and minimize capital gains tax burdens.
CA (Dr.) Suresh Surana says effectively managing stock market losses through capital loss set-off and carry-forward provisions can result in substantial tax savings. To maximize benefits and ensure compliance, investors should maintain accurate records and file tax returns within the prescribed due date.
What are the most common mistakes taxpayers make while setting off stock market losses during ITR filing?
One of the most common mistakes taxpayers make while setting off stock market losses during ITR filing may include the incorrect classification of gains and losses. Many taxpayers fail to distinguish between short-term capital losses (STCL) and long-term capital losses (LTCL), which is critical because the Income-tax Act prescribes different set-off rules.
For instance, an STCL can be adjusted against both short-term and long-term capital gains, whereas an LTCL can only be set off against long-term capital gains. Incorrect reporting often results in denial of set-off or notices from the tax department.
Another frequent error is failing to report losses in the ITR simply because no tax is payable. Taxpayers often assume that if they have incurred a loss, there is no need to disclose it. However, unless such losses are reported in a timely filed return, the benefit of carrying forward capital losses is lost. This can result in missed tax-saving opportunities in future years when gains arise. Further, capital losses can generally be carried forward only if the return is filed within the prescribed due date. Delayed filing may result in the denial of the carry-forward benefit.
Another mistake could include not reconciling transactions with broker statements and the Annual Information Statement (AIS) before filing the return. Further, some taxpayers incorrectly attempt to set off speculative losses, intraday trading losses, or losses from derivatives against regular capital gains without understanding their separate tax treatment.
For example, intraday trading losses are treated as speculative business losses and cannot be adjusted similarly to other capital losses, said CA (Dr.) Suresh Surana.
Can investors carry forward stock market losses even if they have no taxable income this year?
Losses arising from capital assets such as listed shares, equity mutual funds, ETFs, and other securities can be carried forward and adjusted against eligible capital gains in subsequent years, thereby reducing future tax liability. However, taxpayers must note an important compliance requirement that merely incurring a loss does not automatically entitle them to claim the carry-forward benefit.
According to CA (Dr.) Suresh Surana, to preserve this tax advantage, the ITR must be filed within the due date prescribed under Section 139(1) of the Income-tax Act, 1961. If the return is filed belatedly, the taxpayer may lose the ability to carry forward such capital losses. Therefore, even in years with nil taxable income, filing an ITR can be a prudent tax planning measure for investors seeking to optimise future tax savings.
Disclaimer: This article is for informational purposes only and does not constitute professional tax advice. Tax laws and regimes are subject to frequent changes by the government. Readers should verify details with official Income Tax Department notifications or consult a Chartered Accountant before making any financial decisions.
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