Overview
Paying tax on investment gains is unavoidable, but smart tax planning can significantly reduce the amount you owe. One often-overlooked strategy is using capital losses to offset gains and lower your tax liability. In 2026, with increased participation in stocks, mutual funds, ETFs, and digital assets, understanding how capital losses work has become essential for investors.
This article explains what capital losses are, how they can be used to save tax, applicable rules, risks, and what investors should watch next.
Offer snapshot
Capital losses arise when you sell an asset for less than its purchase price. In India, they can be used to:
- Offset capital gains
- Reduce taxable income from investments
- Carry forward losses to future years
However, strict rules apply based on asset type and holding period.
Financials
Types of capital losses
Capital losses are classified based on the holding period of the asset.
Short-Term Capital Loss (STCL):
- Occurs when assets are sold within the short-term holding period
- For equity: sold within 12 months
- For other assets: sold within 36 months
Long-Term Capital Loss (LTCL):
- Occurs when assets are sold after the long-term holding period
The distinction matters because tax treatment differs.
How capital losses reduce tax
The tax-saving mechanism works through set-off rules.
- STCL can be set off against both short-term and long-term capital gains
- LTCL can be set off only against long-term capital gains
This means short-term losses offer greater flexibility in tax planning.
Business highlights
Assets where capital losses apply
Capital losses can arise from selling:
- Stocks and equity mutual funds
- Debt mutual funds
- Real estate
- Gold and other capital assets
Each asset follows specific tax rules, making awareness crucial.
Capital loss harvesting strategy
In 2026, many investors actively use tax loss harvesting.
This involves:
- Selling loss-making investments before the financial year ends
- Using losses to offset gains from profitable investments
- Reinvesting later if the asset still fits the portfolio
When used responsibly, this strategy improves post-tax returns.
Use of proceeds
Set-off rules explained simply
Here’s how capital losses can be adjusted:
- STCL → set off against STCG and LTCG
- LTCL → set off only against LTCG
- Capital losses cannot be set off against salary or business income
Any unadjusted loss can be carried forward.
Carry forward of capital losses
If losses cannot be fully adjusted in the same year:
- They can be carried forward for up to 8 assessment years
- Losses must be declared in the income tax return
- Filing within the due date is mandatory
Failure to file on time means losing the carry-forward benefit.
Risks
Misuse of capital loss harvesting
Selling assets purely for tax reasons can backfire.
- You may exit fundamentally strong investments
- Re-entry at higher prices can reduce long-term returns
- Frequent trading increases transaction costs
Tax decisions should never override investment logic.
Compliance risk
Incorrect reporting can lead to issues.
- Mismatch between broker data and tax returns
- Incorrect classification of losses
- Missing filing deadlines
Accuracy and timely filing are essential to avoid scrutiny.
Market timing risk
Trying to book losses at the wrong time may lock in unnecessary losses during temporary market dips.
What to watch next
In 2026, investors should closely track:
- Changes in capital gains tax rules
- Holding period definitions for different assets
- Annual capital gain statements from brokers
- Portfolio performance before financial year-end
- Opportunities for legitimate tax optimisation
Tax planning works best when integrated with long-term investing discipline.
FAQs
1. Can capital losses reduce my salary income tax?
No. Capital losses can only be set off against capital gains, not salary income.
2. Can I carry forward capital losses if I don’t have gains?
Yes, provided you file your income tax return on time.
3. Can long-term capital losses be used against short-term gains?
No. LTCL can only be set off against LTCG.
4. Do I need to report capital losses even if I don’t want to use them?
Yes. Reporting is mandatory to carry them forward for future use.
5. Is tax loss harvesting legal in India?
Yes. It is legal when done within tax rules and without artificial transactions.