Can I carry forward ₹4.6 lakh short-term capital loss and claim tax exemption on ₹1.5 lakh LTCG?

Kuldeep Kumar Jain earned around ₹1.51 lakh as long-term capital gains (LTCG) but made a short-term capital loss of ₹4.86 lakh in FY 2024-25. Mr Jain wants to know whether he can carry forward the entire STCL amount while claiming ₹1.25 lakh exemption on LTCG and paying tax on the balance.

"My LTCG during FY (2024-2025) is ₹1,51,400 and STCL is ₹4,86,000. Please guide me as to how these will be taxed. I want to avail full exemption of ₹1,25,000 under LTCG and to pay tax @12.5% on the balance ₹26,400 and want to carry forward the entire STCL. Whether it is possible?," Mr Jain wrote in an email.

In accordance with Section 112A of the Income Tax Act, LTCG arising from the transfer of listed equity shares, equity-oriented mutual funds, or units of business trusts, on which Securities Transaction Tax (STT) has been paid, is exempt up to ₹1,25,000 in a financial year. The balance LTCG in excess of ₹1,25,000 i.e. ₹26,400 would be taxable at a rate of 12.5%, without indexation.

Further, capital losses must mandatorily be set off against capital gains in the same year to the extent permissible. Specifically:

• Short-term capital loss (STCL) can be set off against both short-term and long-term capital gains.

• Accordingly, the STCL of ₹4,86,000 will first be adjusted against the entire LTCG of ₹26,400, resulting in a net capital loss of ₹4,59,600.

• Since the LTCG has been fully set off, no LTCG remains taxable, and no exemption under Section 112A can be availed separately.

• The remaining unadjusted STCL of ₹4,59,600 will be eligible to be carried forward for set-off in the subsequent eight assessment years, subject to the return being filed within the due date under Section 139(1).

Which ITR form will apply?

Since the individual has capital gains and losses, the correct form would be ITR-2, which applies to individuals having income from capital gains and other sources, but not having any income under the head "Profits and Gains of Business or Profession".

Accordingly, for Assessment Year 2025–26, ITR-2 should be used, and the capital gains and losses must be reported under the relevant schedules. The loss must be claimed for carry forward by filling in Schedule CFL appropriately.

Selective taxation not allowed