Carry Forward and Set off of Capital Loss [Sec. 111]

Section 111 of the Income-tax Act, 2025 provides rules for the carry forward and set-off of capital losses that cannot be completely adjusted under the intra-head adjustment provisions of Section 108. Capital losses are divided into short-term capital loss (STCL) and long-term capital loss (LTCL), and different set-off restrictions apply to each. Short-term capital loss can be adjusted against both short-term and long-term capital gains, whereas long-term capital loss can be adjusted only against long-term capital gains. Any eligible unabsorbed capital loss may be carried forward for a maximum of eight tax years, subject to statutory conditions.

1. Set-off of Short-Term Capital Loss

A short-term capital loss (STCL) arises from the transfer of a short-term capital asset where the allowable cost and transfer-related deductions exceed the consideration received or accruing. Under Section 111, a brought-forward short-term capital loss can be set off against income under the head Capital Gains arising from any capital asset. Therefore, it may be adjusted against either short-term capital gain (STCG) or long-term capital gain (LTCG). It cannot, however, be adjusted against salary, house-property income, business income or income from other sources. Any eligible STCL remaining unabsorbed may continue to be carried forward within the prescribed period.

2. Set-off of Long-Term Capital Loss

A long-term capital loss (LTCL) arises where computation relating to a long-term capital asset results in a loss. Section 111 imposes a stricter restriction on its adjustment. A brought-forward long-term capital loss can be set off only against long-term capital gains arising from another long-term capital asset. It cannot be adjusted against short-term capital gains, even though both amounts fall under the head Capital Gains. Further, it cannot be adjusted against income under any other head. Where the available long-term capital gain is insufficient to absorb the entire loss, the remaining eligible loss may be carried forward to subsequent tax years.

3. Carry Forward of Capital Loss

Where a capital loss cannot be wholly set off against eligible capital gains, Section 111 permits the unabsorbed capital loss to be carried forward to the following tax year. In subsequent years, its original character continues to apply: brought-forward STCL may be adjusted against STCG or LTCG, whereas brought-forward LTCL may be adjusted only against LTCG. If the loss is not fully absorbed in one subsequent year, the remaining amount may again be carried forward, subject to the statutory time limit. Capital loss remains ring-fenced within the Capital Gains head and cannot be used to reduce income taxable under other heads.

4. Period of Carry Forward

Under Section 111(2), an eligible capital loss cannot be carried forward for more than eight tax years immediately succeeding the tax year for which the loss was first computed. The eight-year period applies separately to the loss arising in each tax year. If part of the loss is set off during any subsequent year, only the remaining balance continues to be carried forward within the original eight-year period. After expiry of this period, any unabsorbed capital loss ordinarily lapses and cannot be adjusted in later years. Therefore, year-wise records of STCL, LTCL, utilisation and remaining balances should be properly maintained.

Set-off Rules at a Glance

illustration

Suppose an assessee has STCL of ₹2,00,000, LTCL of ₹1,50,000, STCG of ₹1,20,000 and LTCG of ₹1,00,000.

Thus, ₹1,30,000 LTCL remains to be carried forward and can be set off only against future long-term capital gains, within the eight-tax-year limit.