For the last fiscal year (ended March 31, 2008), I incurred a short-term capital loss on the sale of mutual funds. I will not be able to use the current year's entire short-term loss to offset the capital gains as the short-term losses are higher than the gains. Can I carry forward these short-term losses to offset the capital gains in the future years?
Yes. According to Section 74 of the Income Tax Act, 1961, you can offset your losses and even carry forward them for eight assessment years immediately succeeding the year in which the loss was first computed.
As per the act, any loss related to a short-term capital asset (like the sale of equity funds/shares within one year), can be set off against income under capital gains in respect of any other capital asset (be it short-term or long-term). This means, you can even offset this loss against any long-term capital gain. For instance, let's say you invested in a debt fund. After a year, you sell the units and book a profit (long term capital gains). You can offset this gain with your short-term mutual fund investment loss.