How capital market losses can be adjusted under income tax rules
Investors often incur losses in shares or derivatives while making gains in other investments such as mutual funds. Today’s Ask Wallet Wise query explains how income tax laws allow the set-off and carry forward of such losses, subject to specific conditions.
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I would like to know whether, for the financial year 2025–26, if I sell shares or derivatives and incur a loss of Rs 5 lakh on shares, can this loss be adjusted or set off against the long-term capital gains that I may earn from the sale of mutual funds.
Expert’s Advice: Under the Income-tax Act, losses can be set off in certain cases under the same head of income. If the net result under a particular head is a loss, it may be set off against income under other heads, subject to specific restrictions.
A regular business loss can be set off against any income except salary income. However, a speculative loss can be set off only against speculative gains in the same financial year. Any unabsorbed speculative loss cannot be adjusted against other income and must be carried forward for up to four assessment years, where it can be set off only against speculative income.
Speculative transactions are those where the contract is settled without actual delivery. Although derivative transactions are squared off without delivery, they are treated as non-speculative business income under the Income-tax Act and are taxed under the head “Profits and Gains of Business or Profession.” Any loss from derivative transactions can be set off against income under the capital gains head, whether short-term or long-term.
Share transactions are generally taxed under the head ‘Capital Gains’.
- Short-term capital losses can be set off against both short-term and long-term capital gains.
- Long-term capital losses can be set off only against long-term capital gains.
Accordingly, your loss on shares can be adjusted against capital gains from mutual funds, either short-term or long-term, depending on whether the share loss is classified as short-term or long-term.
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