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9.5 Setting Off Capital Gains and Losses under the Income Tax Act

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NISM-Series-V-A: Mutual Fund Distributors Certification Examination Exam

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1 Chapter 1: Introduction & Exam Overview

1.1 About the NISM-Series-V-A Examination 1.2 The 12-Unit Curriculum Map and a Study Plan

2 Chapter 2: Investment Landscape

2.1 Investors and Their Financial Goals 2.2 Savings or Investments? 2.3 Different Asset Classes 2.4 Investment Risks 2.5 Risk Measures and Management Strategies 2.6 Behavioural Biases in Investment Decision Making 2.7 Risk Profiling 2.8 Asset Allocation and Do-It-Yourself versus Professional Help

3 Chapter 3: Concept and Role of a Mutual Fund

3.1 Concept of a Mutual Fund 3.2 Classification of Mutual Funds 3.3 Growth of the Mutual Fund Industry in India

4 Chapter 4: Legal Structure of Mutual Funds in India

4.1 Structure of Mutual Funds in India 4.2 Key Constituents of a Mutual Fund 4.3 AMC Organisation Structure and Service Providers 4.4 Role and Function of AMFI

5 Chapter 5: Legal and Regulatory Framework

5.1 Role of Regulators in India 5.2 Role of SEBI and the Mutual Fund Regulations 5.3 Due Diligence Process by AMCs for Distributors 5.4 Investor Grievance Redress Mechanism 5.5 AMFI Code of Conduct for Intermediaries

6 Chapter 6: Scheme Related Information

6.1 Mandatory Documents I: Scheme Information Document and Statement of Additional Information 6.2 Mandatory Documents II: Key Information Memorandum and the Advertisement Code 6.3 Non-Mandatory Disclosures

7 Chapter 7: Fund Distribution and Channel Management Practices

7.1 The Role and Importance of Mutual Fund Distributors 7.2 Different Kinds of Mutual Fund Distributors 7.3 Modes of Distribution 7.4 Pre-requisites to Become a Distributor of a Mutual Fund 7.5 Revenue for a Mutual Fund Distributor 7.6 Commission Disclosure Mandated by SEBI 7.7 Distributors versus Investment Advisers, Nomination Facilities and Change of Distributor

8 Chapter 8: Net Asset Value, Total Expense Ratio and Pricing of Units

8.1 Fair Valuation Principles 8.2 Computation of Net Assets of a Scheme and NAV 8.3 Dividends and Distributable Reserves 8.4 Entry and Exit Load and Its Impact on NAV 8.5 The Expense Ratio Framework: Base Expense Ratio, Brokerage and Statutory Levies 8.6 Key Accounting and Reporting Requirements 8.7 NAV, Total Expense Ratio and Pricing of Units for the Segregated Portfolio

9 Chapter 9: Taxation

9.1 Applicability of Taxes in Respect of Mutual Funds 9.2 Capital Gains on Mutual Fund Units 9.3 Dividend (IDCW) Income and Tax Deducted at Source 9.4 Stamp Duty and Securities Transaction Tax on Mutual Fund Units 9.5 Setting Off Capital Gains and Losses under the Income Tax Act 9.6 Tax Benefit under Section 80C and Applicability of GST

10 Chapter 10: Investor Services

10.1 The New Fund Offer Process 10.2 New Fund Offer Price and Ongoing Offer Price for Subscription 10.3 Investment Plans and Services 10.4 Allotment of Units and Account Statements 10.5 Mutual Fund Investors: Who Can Invest 10.6 Filling the Application Form for Mutual Funds 10.7 Financial Transactions with Mutual Funds 10.8 Cut-Off Time and Time Stamping 10.9 KYC Requirements for Mutual Fund Investors 10.10 Systematic Transactions and Their Operational Aspects 10.11 Non-Financial Transactions, Special Investor Categories and Turnaround Times

11 Chapter 11: Risk, Return and Performance of Funds

11.1 General and Specific Risk Factors 11.2 Factors That Affect Mutual Fund Performance 11.3 Drivers of Returns and Risk in a Scheme 11.4 Measures of Returns 11.5 SEBI Norms Regarding Representation of Returns 11.6 Risks in Fund Investing: The Investor's Perspective 11.7 Measures of Risk and Provisions Relating to Credit Risk

12 Chapter 12: Mutual Fund Scheme Performance

12.1 Benchmarks and Performance 12.2 Price Return Index or Total Return Index 12.3 Basis of Choosing an Appropriate Performance Benchmark 12.4 Benchmarks for Equity Schemes 12.5 Benchmarks for Debt Schemes and Other Schemes 12.6 Quantitative Measures of Fund Manager Performance 12.7 Tracking Error and Scheme Performance Disclosure

13 Chapter 13: Mutual Fund Scheme Selection

13.1 Scheme Selection Based on Investor Needs, Preference and Risk Profile 13.2 Risk Levels in Mutual Fund Schemes 13.3 Scheme Selection Based on Investment Strategy 13.4 Selecting a Scheme Across AMCs or Within a Scheme Category 13.5 Selecting Options in Mutual Fund Schemes and Do's and Don'ts

9.5 Setting Off Capital Gains and Losses under the Income Tax Act

Key Takeaways Explain This Topic AI

Short-term capital loss may be set off against both short-term and long-term capital gains.

Long-term capital loss may be set off only against long-term capital gains.

Capital losses cannot be set off against salary, business or other heads of income.

Unabsorbed capital losses may be carried forward for eight assessment years.

Carry-forward requires filing the income tax return within the due date.

Last updated: August 2026

The Asymmetry That Drives Every Question

The set-off rules are not symmetrical, and the asymmetry is the whole content of the sub-topic.

  • Loss type Can be set off against
  • Short-term capital loss (STCL) Short-term capital gains AND long-term capital gains
  • Long-term capital loss (LTCL) Long-term capital gains only

A short-term loss is the more flexible instrument. A long-term loss is confined.

The policy logic is that long-term gains are taxed at concessional rates, so allowing a long-term loss to shelter short-term gains taxed at higher rates would give the loss more value than the corresponding gain ever carried.

Capital Losses Stay Within the Capital Gains Head

A capital loss can be set off only against capital gains . It cannot be set off against:

  • Salary income
  • Income from house property
  • Business or professional income
  • Income from other sources, including interest and IDCW

An investor with a INR 5 lakh capital loss and INR 30 lakh of salary income cannot reduce the salary tax by a rupee. This is the most common misconception a distributor encounters.

Carry Forward

Where a loss cannot be absorbed in the year it arises:

  • It may be carried forward for eight assessment years immediately following the year of loss
  • It retains its character : a carried-forward long-term loss can still be set off only against long-term gains
  • The income tax return must be filed within the due date for the loss to be carried forward at all

That last condition is absolute and is a favourite examination point. An investor who realised a substantial loss but filed a belated return forfeits the carry-forward entirely . There is no relief for the omission.

Worked Examples

Example 1 — short-term loss against long-term gain. In one financial year an investor has: Short-term capital loss on an equity fund = INR 1,80,000

Long-term capital gain on an equity fund = INR 4,00,000

The short-term loss may be set off against the long-term gain: Net long-term gain = 4,00,000 - 1,80,000 = INR 2,20,000

  • Less annual exemption = INR 1,25,000
  • Taxable = INR 95,000
  • Tax at 12.5% = INR 11,875 (plus cess)
  • Example 2 — long-term loss cannot reach a short-term gain. Long-term capital loss = INR 2,50,000
  • Short-term capital gain = INR 3,00,000

The long-term loss cannot be set off against the short-term gain. The short-term gain of INR 3,00,000 is taxed in full at 20% for equity-oriented units, and the long-term loss of INR 2,50,000 is carried forward for up to eight assessment years to be set against future long-term gains.

  • Example 3 — order and carry forward. STCL = INR 6,00,000
  • STCG = INR 2,00,000
  • LTCG = INR 1,50,000
  • Set off STCL against STCG = 2,00,000 absorbed
  • Set off STCL against LTCG = 1,50,000 absorbed
  • Absorbed in total = INR 3,50,000
  • Carried forward = INR 2,50,000 as short-term loss

The carried-forward amount retains its short-term character , so in future years it remains available against both types of gain — which is why realising short-term losses is more useful than realising long-term ones.

Tax-Loss Harvesting

The rules give rise to a legitimate planning technique. An investor holding a scheme at a loss may redeem to realise it, set the loss against gains realised elsewhere in the same year, and reinvest.

Points a distributor should raise before recommending it:

  • The exit load may apply, which can exceed the tax saved on a small position
  • The reinvestment starts a fresh holding period , which matters for future long-term treatment
  • The investor is out of the market briefly between redemption and reallotment

It is only worthwhile where there are gains to set off in the same year or a realistic expectation of them within the carry-forward window

The investor should confirm the position with their tax adviser ; a distributor should not compute the liability

Harvesting is a genuine technique, not a trick, but it is frequently recommended where the arithmetic does not support it.

Summary

  • Question Answer
  • STCL against STCG? Yes
  • STCL against LTCG? Yes
  • LTCL against STCG? No
  • LTCL against LTCG? Yes
  • Capital loss against salary or interest income? No
  • Carry-forward period 8 assessment years
  • Condition for carry-forward Return filed within the due date