How short-term losses can reduce long-term capital gains tax

I made more than Rs 1.25 lakh in long-term capital gains (LTCG) from equity mutual funds. Can I use my short-term capital loss (STCL) to reduce tax? - Satya Narayana Gottipati

Yes, you can! If your long-term capital gains (LTCG) from equity mutual funds exceed Rs 1.25 lakh in a financial year, the extra amount is taxed at 12.5 per cent. However, if you have short-term capital loss (STCL) from equity mutual funds, you can use it to reduce this taxable amount and lower your tax bill.

What do long-term and short-term mean here?

• Long-term: Profits or losses from equity mutual funds held for more than one year.
  
• Short-term: Profits or losses from equity mutual funds sold within one year.

How to reduce your LTCG tax

Imagine you made Rs 2 lakh in long-term gains from equity mutual funds this year. The first Rs 1.25 lakh is tax-free, but the remaining Rs 75,000 is taxable at 12.5 per cent, which means you owe Rs 9,375 in tax.

Now, let's say you also lost Rs 50,000 (short-term capital loss) by selling another equity mutual fund at a lower price. You can subtract this Rs 50,000 loss from your taxable LTCG, so your new taxable amount becomes Rs 25,000 instead of Rs 75,000. Now, your tax is only Rs 3,125 instead of Rs 9,375!

However, if your loss was long-term, it could only be used to offset long-term gain, not short-term capital gains.

This means long-term losses can only be used for reducing long-term gains, while short-term losses can reduce both long-term and short-term capital gains.

So, if your short-term loss is more than your long-term gain, you can carry forward the extra loss for up to eight years and use it to reduce future capital gains.

Here's how: continuing the above example, if your short-term capital loss is Rs 1 lakh and the effective long-term gains is Rs 75,000, you would still have Rs 25,000 in remaining losses. This unused loss can be carried forward for up to eight years to offset future capital gains.

This simple strategy can help you reduce your tax burden while managing your investments wisely!

Also read: Does NPS Tier II offer tax benefits?

This article was originally published on March 11, 2025.