Sold a fund at a loss? It could save you tax

Reader’s question: I made more than Rs 1.25 lakh in long-term capital gains from equity mutual funds. Can I use my short-term capital loss to reduce the tax I owe?

Yes, and it is one of the more useful tax-saving strategies that most investors do not think to apply.

First, a quick definition

When you sell equity mutual fund units, the tax treatment depends on how long you held them.

Hold for more than one year and any profit or loss is classified as long-term. Hold for one year or less, and it is short-term. This distinction matters because the rules for offsetting losses are different for each.

How the offset works

If your long-term capital gains from equity mutual funds exceed Rs 1.25 lakh in a financial year, the amount above that threshold is taxed at 12.5 per cent. But if you also have a short-term capital loss from selling another equity mutual fund at a lower price than you paid, you can use that loss to reduce the taxable gain before the tax is calculated.

Here is what that looks like in practice:

One loss, Rs 6,250 saved.

The rule on which losses can offset which gains

Not all losses are eligible for offsetting each other. The Income Tax Act is specific:

• A short-term capital loss can be used to offset both short-term and long-term capital gains.
• A long-term capital loss can only offset long-term capital gains, not short-term ones.

In practice, this means short-term losses are the more flexible tool. If you are sitting on a short-term loss in one fund and a taxable long-term gain from another, you can redeem the first to reduce the tax on the second and buy it again for the same amount if this was meant for a long-term holding.

What happens if the loss is larger than the gain

If your short-term capital loss exceeds your taxable long-term gain in a given year, the unused portion does not disappear. It can be carried forward for up to eight assessment years and used to offset future capital gains.

Continuing the example above: if the short-term loss was Rs 1 lakh instead of Rs 50,000, and the net taxable LTCG was Rs 75,000, the remaining Rs 25,000 loss carries forward. It is available to reduce your tax bill in any of the next eight financial years as long as you file your income tax return on time for the year in which the loss occurred.

Also read: Should you worry when your fund manager changes?

This article was originally published on March 11, 2025, and last updated on April 24, 2026.