Can I set off my short-term loss in equities from short-term gains in debt funds to save income tax?

Can I set off my short-term loss in equities of last year from short-term gains in debt funds to save income tax? 

Richa, Bengaluru

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Reply by: CA Tarun Kumar - Head of Direct tax practice at Coherent Advisors

Set-off refers to the adjustment of losses against profits from another source or head of income within the same assessment year. The process of setting off losses involves two steps: intra-head adjustment and inter-head adjustment. Before making any inter-head adjustments, losses should be set off against similar income that is taxable under the same head of income.  

Capital losses come in two types: short-term capital loss and long-term capital loss. For losses under the head of capital gains, it is specified that long-term capital losses can only be set off against long-term capital gains. They cannot be set off against short-term capital gains, despite both falling under the same head of "Capital Gains." However, a short-term capital loss can be set off against any capital gain, whether short-term or long-term.  

If the capital loss cannot be set off against the eligible capital gains due to inadequacy of income during the current year, it can be carried forward for up to 8 Assessment Years and set off against the relevant capital gains of the subsequent year. Short-term and long-term capital losses that could not be set off during the year shall be carried forward separately. In subsequent years, a short-term capital loss can be set off against short-term or long-term capital gain, but the brought forward long-term capital loss shall only be set off against long-term capital gains.  

In your case, since you have a short-term carried forward loss of equity shares, as per the provisions of the Income-tax Act, taxpayers are allowed to set off short-term capital losses against short-term capital gains in any other asset class. Therefore, if you have incurred a short-term loss from equity shares, you can set it off against the short-term gains from debt funds under the head of "Capital Gains." 

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