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You have made a profit on one investment and a loss on another. You do not have to pay tax on the full gain. A short-term capital loss can be set off against a long-term capital gain in the same financial year, which brings down the amount on which you are taxed.
How it works
Say you sell an equity mutual fund and realise a long-term capital gain of Rs 2 lakh. In the same year, you book a short-term capital loss of Rs 60,000 on another investment.
You set off the loss against the gain first. Your net long-term capital gain falls to Rs 1.4 lakh.
For equity mutual funds, LTCG up to Rs 1.25 lakh in a financial year is tax-free. So the taxable portion is only Rs 15,000. At the current rate of 12.5 per cent, your tax works out to Rs 1,875.
Without the loss set-off, your net gain would have been Rs 2 lakh, with Rs 75,000 taxable after the exemption, and a tax of Rs 9,375.
The rules on set-offs
Short-term capital loss can be set off against both short-term and long-term capital gains. Long-term capital loss can be set off only against long-term capital gains. It cannot be adjusted against short-term gains.
What if you cannot use the loss this year?
If your losses exceed your gains in a financial year, you can carry them forward for up to eight assessment years. But you must file your income-tax return by the due date to preserve that right. The same set-off rules apply when you use the carried-forward loss in future years.
A note on debt funds
These rules apply to equity and equity-oriented mutual funds. Debt mutual funds are taxed differently. If you purchased debt fund units on or after April 1, 2023, the gains are added to your income and taxed at your applicable slab rate, regardless of how long you held them. The LTCG and STCG framework does not apply to those units.
The takeaway
Using a capital loss to reduce your tax bill is perfectly legitimate. But tax should not drive your investment decisions. If an investment no longer fits your portfolio, booking a loss can make both financial and tax sense. Selling a good investment just to save tax usually does not.
If you do book a loss, report it in your return. Even if you cannot use it immediately, filing on time keeps your options open.
Also read: Does the Rs 1.25 lakh LTCG exemption apply to SGBs?
This article was originally published on August 03, 2026.
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