Capital losses arise when you make a loss on the sale of a capital asset. Long-term capital losses occur on assets held for over 2 years and are calculated after indexing the cost of purchasing the asset. 

In India, Long Term Capital Loss (LTCL) can be set off or carried forward when filing your income tax returns. The rules differ in setting off and taking forward for different income sources.

Benefits from Setting Off an LTCL

You set off your long term capital loss by adjusting it only against income from long term capital gains of the current year. It brings you a lower tax outgo with a reduced taxable income. This is only applicable on the amount by which your LTCG was reduced while the remaining amount is taxed at 10% tax plus cess. 

Let’s say, for instance, that you earn capital gains of ₹30 lakhs from selling an apartment but suffered a capital loss of ₹15 lakhs from another investment. You can set off the loss of ₹15 lakhs against the gain of ₹30 lakhs, thus reducing your taxable income and thereby your tax outgo.

Benefits from Carrying Forward an LTCL

At times, your capital losses might exceed your capital gains. In this case, you are allowed to carry forward your long term capital loss to set off against future capital gains. You can take forward your long-term capital losses for up to 8 assessment years following the year you suffered and computed the loss. 

Here’s an example. Say you earned capital gains of ₹10 lakhs from one investment but incurred capital losses of ₹15 lakhs from another. You carry forward the remaining loss of ₹5 lakhs to the next year or later. 

Special Case - LTCL from Shares and Equity Mutual Funds

Before Budget 2018, long term gains from these assets were not allowed the same treatment of setting off or carrying forward. This is largely because capital gains earned from equity and equity mutual funds were exempted from taxation. As a rule, exempted income cannot be used to set off capital losses. The profits and gains on these assets are now taxable if they exceed ₹1 lakh in amount. Post-March 2018, if you suffer a long term capital loss when you sell shares or equity funds, you are allowed to set them off against any long-term capital gain. The losses can also be carried forward to set off later within 8 assessment years.