Tax calculation: Here's a capital gains tax hack on how to use losses smartly to lower your FY26 tax outgo

As a taxpayer with both long-term and short-term capital losses in FY 2025–26, you can optimise your tax liability by setting them off against eligible capital gains as per the Income Tax Act, 1961. The rules for adjustment are clearly laid out and must be followed in a specific order to maximise tax efficiency. Setting off capital gains tax refers to the process of reducing your tax liability on capital gains by adjusting it against capital losses you've incurred in the same or previous years.

Capital gains tax is a tax imposed on the profits obtained from the sale of assets like real estate, stocks, and mutual funds. The tax rate is determined by the duration for which the asset was held prior to its sale, known as the holding period.

The Income-tax Act of 1961 outlines set guidelines for offsetting capital gains and losses. This enables taxpayers to deduct losses from gains effectively, ultimately reducing their tax burden. The treatment procedure differs depending on whether the gains or losses are short-term (STCG/STCL) or long-term (LTCG/LTCL).

Set-off Rules You Must Follow

Short-term capital losses (STCL) can be set off against both short-term and long-term capital gains. This provides flexibility and is beneficial if you have gains of either kind during the same financial year.

Long-term capital losses (LTCL), however, can only be set off against long-term capital gains (LTCG). They cannot be adjusted against short-term gains.

If your losses exceed gains in a given year, you can carry forward the remaining loss for up to 8 assessment years, provided you’ve filed your income tax return on time.

"If capital losses exceed gains in the current year, the remaining losses can be carried forward for up to 8 financial years. However, to claim this benefit, taxpayers must declare the loss in their Income Tax Return (ITR) on or before the applicable due date of furnishing the income-tax return. Carried-forward losses can be adjusted against eligible capital gains in subsequent years, allowing investors to maximise their tax efficiency overtime," CA Dr Suresh Surana. 

Exemption Under Section 112A (Rs. 1.25 Lakh LTCG Exemption)

In accordance with Section 112A of the IT Act, the Rs. 1.25 lakh LTCG exemption is applied before setting off any Long-Term Capital Loss (LTCL). This means that in each financial year, the first Rs. 1.25 lakh of LTCG is automatically exempt from tax, irrespective of any losses. Only the LTCG exceeding Rs. 1.25 lakh is considered for set-off against LTCL. After adjusting the losses, any remaining LTCG is then subjected to be taxed. Therefore, LTCL cannot be set off against the exempt Rs. 1.25 lakh LTCG, but only against the taxable LTCG exceeding this threshold.

Carry Forward Provision

If your total capital losses are more than your gains in FY 2025–26, the unadjusted portion can be carried forward for 8 assessment years—but only if you’ve filed your return before the due date under section 139(1).

By following this order and complying with timelines, you can reduce your capital gains tax outgo and plan your investments more strategically for future years.