One-time set-off of long-term capital loss against STCG: New income tax bill 2025 allows this from tax year 2026-27 onwards

Economic Times

21-05-2025

What did the New Income Tax Bill 2025 say about long term capital loss?
What does this mean?
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How different is the proposed change in comparison with the old provisions of capital gains?
What might be the impact of these changes for individual taxpayers?
A temporary relief from the otherwise restrictive loss set-off rules under Income Tax
Faster utilisation of capital losses and reduced income tax outgo
This can help with tax planning process for FY 2026–27 onwards
Why is this set-off provisions relief a one-time measure and not recurring?
The new income tax bill, 2025 has introduced a one-time relief for those who want to reduce their capital gains tax outgo by reducing their short-term capital gains (STCG). In technical terms, the new income tax bill , 2025 allows any brought forward long-term capital loss (LTCL) incurred up to March 31, 2026, to be set-off against any short-term capital gains (STCG). If you notice closely, the word is 'any', so it means any LTCL if incurred under the Income Tax Act, 1961 can be set-off with STCG . But since this is the New Income Tax Bill , 2025 so it is likely to be applicable from April 1, 2026 onwards i.e. tax year 2026–27 onwardsThis is a big positive development especially when you consider the fact that the existing Income Tax Act, 1961 allowed long term capital loss to be set-off only against long term capital gains (LTCG). So, by opening up the feature to set-off LTCL with both LTCG and STCG, the total capital gains tax outgo of an individual may get significantly lower. This may help many taxpayers, including ones who have been carrying forward the losses and are eligible to do so for the next two years.Read below to know more about this change in the proposed income tax bill, 2025 and what are its eligibility conditions.The New Income Tax Bill, 2025 said: 'any amount of loss under the head capital gains, whether related to a long-term capital asset or a short term capital asset, referred to in section 74 of the repealed Income-tax Act, brought forward from the tax year beginning before the 1st April, 2026 had the Income-tax Act, 1961 not been repealed, shall be set off and carried forward against the income under the head 'Capital gains' computed under this Act for any tax year beginning on or after the 1st April, 2026 up to eight financial years immediately succeeding the financial year in which such loss was first computed under the repealed Income-tax Act;'This means under clause 536 (n) of the Income Tax Bill, 2025 taxpayers are allowed to carry forward and set off of brought forward LTCL incurred up to 31 March 2026 against all future capital gains (including STCG) from tax year 2026-27 onwards.Chartered Accountant (Dr.) Suresh Surana explains: 'Under clause 536(n) of the new tax bill, 2025 any capital loss, whether long-term or short-term, computed under the old Income Tax Act, 1961 and brought forward as on 31 March 2026, may be set off and carried forward against 'income under the head 'Capital gains'' under the new tax bill 2025. Notably, this provision does not draw a distinction between long-term and short-term capital gains for the purpose of set-off.'Surana says, previously under Section 74 of the Income-tax Act, 1961 , long-term capital losses (LTCL) could be carried forward and set off only against long-term capital gains (LTCG), now STCG is also included.Aseem Mowar, Tax Partner EY India, explains: 'Currently, the Income Tax Act, 1961 allows the set-off of brought forward Long-Term Capital Losses (LTCL) only against Long-Term Capital Gains (LTCG), limiting taxpayers' flexibility to offset LTCL with Short-Term Capital Gains (STCG).'Mowar adds: 'The proposed new Income Tax Bill, 2025 continues this restriction for LTCL incurred after April 1, 2026, but the 'Repeal and Saving' clause in Section 536 (specifically 536(2)(n)) permits the set-off of LTCL incurred until March 31, 2026, against any capital gains under ITB 2025 for tax years starting on or after April 1, 2026, for up to eight financial years immediately succeeding the financial year in which such loss was first computed under the current Income Tax Act, 1961.'We have asked experts about what might be the impact of these proposed changes in the new tax bill, 2025, here's what they said:Surana says: The transitional provision under Section 536(n) of the Income-tax Bill, 2025, carries significant implications for taxpayers holding accumulated capital losses, particularly long-term capital losses (LTCL), as on 31 March 2026. By permitting the set-off of such brought forward losses, whether long-term or short-term, against any form of capital gains under the new Income Tax Bill, 2025 the legislation offers a temporary but meaningful departure from the restrictive loss-set-off rules under the current Income-tax Act, 1961.Surana says: 'This broader scope of set-off could result in faster absorption of losses, leading to reduced tax outgo in the initial years of transition and better cash flow management. It also opens up tax planning opportunities for taxpayers who might have been unable to fully utilise their LTCL due to the absence of corresponding LTCG in the past.'Mowar from EY India says: There exists tax planning opportunities. 'Taxpayers can sell investments likely to incur long-term losses before April 1, 2026, allowing them to offset these losses against future short-term capital gains. This one-time measure also aids taxpayers in adjusting to the new tax regime.'Notably, the 'Repeal and Saving' clause under which clause 536 (2)(n) falls, does not require that long-term and short-term losses be utilised separately. 'This dispensation, albeit temporary, allows taxpayers to leverage their losses more effectively, reducing overall tax liabilities. However, losses incurred after April 1, 2026, will still face the same limitations, with long-term losses offsetting only long-term gains,' says Mowar.Mowar says the clause 536 (2)(n) of the new tax bill, 2025 is written under the 'Real and Saving clause'.'It is important to note that 'Repeal and Saving' clauses are typically included when old legislation is replaced with new one, ensuring that certain rights or obligations under the old law are preserved. This was clarified by the tax department in the General FAQ issued with the new tax bill, 2025 also,' says Mowar.Mowar says: 'The majority may argue that this appears to be a well-thought-out dispensation given the distinction and specific provisions made, others may view it as an oversight, as it contradicts established provisions. Thus, it remains to be seen how the provision is ultimately enacted.'