Section 74 Income Tax Act: Capital Loss Set-Off and Carry Forward
Section 74 of the Income-tax Act, 1961 governs the carry forward and set-off of losses under the head "Capital gains". Short-term capital losses may be set off against eligible short-term or long-term capital gains; long-term capital losses may be set off only against eligible long-term capital gains.
What is a capital loss?
A capital loss arises when the permitted computation under the head "Capital gains" results in a loss on transfer of a capital asset. A short-term capital loss (STCL) relates to a short-term capital asset; a long-term capital loss (LTCL) relates to a long-term capital asset. Holding periods and classifications depend on the asset and transfer date, including the rules in Section 2(42A). Set-off means adjusting an eligible loss against taxable gains; carry forward preserves an unused eligible loss for later years.
Section 74: Explanation of the statutory provisions
Section 74(1): Net loss under capital gains
Where the computation under "Capital gains" produces a net loss in an assessment year, the eligible amount is carried forward to the following assessment year, subject to the other provisions of Chapter VI.
Section 74(1)(a): Short-term capital loss
A carried-forward loss relating to a short-term capital asset may be set off against income under "Capital gains" from any other capital asset, whether short-term or long-term, to the extent otherwise permitted.
Section 74(1)(b): Long-term capital loss
A carried-forward loss relating to a long-term capital asset may be set off against income under "Capital gains" from a capital asset other than a short-term capital asset. Accordingly, LTCL is adjustable only against eligible LTCG.
Section 74(1)(c): Remaining loss
If a qualifying loss is not wholly absorbed in the succeeding assessment year, the balance may be carried forward further, subject to the original expiry date and other applicable conditions.
Section 74(2): Eight-year carry-forward period
No loss may be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which it was first computed. Partial use does not restart the eight-year clock.
Former Section 74(3)
Subsection (3) was omitted by Act 20 of 2002, section 29, effective 1 April 2003.
Conditions and special rules
- Eligible gains: Carried-forward capital losses cannot be used against salary, business income, house-property income or income from other sources.
- Loss return: Sections 80 and 139(3) ordinarily require a loss return within the due date under Section 139(1) to preserve carry-forward eligibility, subject to applicable relief.
- Exempt transactions: Exempt gains and losses arising from exempt sources require careful treatment; not every economic loss is a deductible capital loss.
- Special asset regimes: Special provisions, including Section 115BBH for virtual digital assets, may prevent ordinary capital-loss treatment.
- Transfer date: Verify the applicable holding period, cost computation, tax treatment and amendments in force for the transaction year.
Examples of capital-loss set-off
| Loss | Taxable gain | Outcome |
|---|---|---|
| STCL Rs. 1,20,000 | STCG Rs. 80,000 | Up to Rs. 80,000 may be adjusted; Rs. 40,000 may remain eligible. |
| STCL Rs. 1,20,000 | LTCG Rs. 90,000 | Up to Rs. 90,000 may be adjusted. |
| LTCL Rs. 1,20,000 | STCG Rs. 90,000 | No adjustment of LTCL against STCG. |
| LTCL Rs. 1,20,000 | LTCG Rs. 90,000 | Up to Rs. 90,000 may be adjusted; Rs. 30,000 may remain eligible. |
Illustrations assume legally recognised losses, eligible taxable gains and compliance with filing conditions.
Comparison: STCL and LTCL
| Set-off rule | STCL | LTCL |
|---|---|---|
| Against STCG | Permitted | Not permitted |
| Against LTCG | Permitted | Permitted |
| Against other income heads | Not permitted | Not permitted |
| Carry forward | Eight succeeding assessment years | Eight succeeding assessment years |
Legislative history
- Section 74 substituted by Act 11 of 1987, section 31, effective 1 April 1988.
- Subsection (1) substituted by Act 20 of 2002, section 29, effective 1 April 2003.
- Subsection (3) omitted by Act 20 of 2002, section 29, effective 1 April 2003.
Frequently asked questions
Can LTCL be adjusted against STCG?
No. Section 74(1)(b) permits it only against eligible long-term capital gains.
Can STCL be adjusted against LTCG?
Yes, subject to the other applicable provisions.
What is the maximum carry-forward period?
Eight assessment years immediately succeeding the assessment year in which the loss was first computed.
Must a capital loss be declared in a timely return?
Generally yes, for carry-forward purposes under Sections 80 and 139(3), subject to applicable relief.
Official legal references
See the Income Tax Department legislation portal, India Code and Income Tax e-Filing portal. Confirm amendments and the applicable Act for the relevant tax year.
General legal information; individual tax treatment depends on the facts and the law applicable to the relevant year.