Section 111 of the Income-tax Act, 2025 carries forward an unabsorbed capital loss for up to eight tax years. A carried-forward short-term loss may be set off against any capital gains; a long-term loss only against long-term capital gains.
What section 111 does
Section 111 carries forward what section 108 could not absorb within the capital gains head — the successor to section 74 of the Income-tax Act, 1961.
The character of the loss survives the carry forward. A short-term capital loss brought forward may be set off against gains in respect of any other capital asset, short-term or long-term. A long-term capital loss may be set off only against gains in respect of another long-term capital asset.
The limit is eight tax years immediately succeeding the year the loss was first computed. And because section 109(2) bars any inter-head set off of capital losses, a capital loss has nowhere else to go — the carry forward is the only route.
The Income-tax Act, 2025 takes effect from 1 April 2026 and applies from tax year 2026-27. The Income-tax Act, 1961 continues to govern every year up to 31 March 2026, including assessments, appeals and penalties for those years, because of the repeal and savings provision in section 536. Figures quoted here are the amounts written into the Act as enacted (with the Gazette corrigenda of 3 September 2025); the annual Finance Act can change rates and thresholds.
Old Act and new Act, side by side
The table below shows what the Income-tax Act, 1961 did and where the same ground is covered in the Income-tax Act, 2025.
| Income-tax Act, 1961 | What it did | Income-tax Act, 2025 |
|---|---|---|
| 74(1)(a) | Carry forward of short-term capital loss | 111(1)(a)(i) |
| 74(1)(b) | Carry forward of long-term capital loss | 111(1)(a)(ii) |
| 74(2) | Eight-year limit | 111(2) |
| 70(2) and (3) | Current-year set off within the head | 108(2) |
| 71(3) | No inter-head set off | 109(2) |
| 80 | Timely return required | 121 |
Section 111 sub-section by sub-section
Read this alongside the bare text — each heading below is a sub-section of the section as enacted.
Sub-section (1)(a) — carrying the character forward
Where a loss under the head Capital gains cannot be wholly set off against capital gains as per section 108, the unabsorbed amount is carried forward and set off as follows: (i) if it relates to a short-term capital asset, only against capital gains in respect of any other capital asset; (ii) if it relates to a long-term capital asset, only against capital gains in respect of any other long-term capital asset.
Sub-section (1)(b) — rolling forward
If the loss cannot be wholly set off under clause (a) in the following year, the balance is carried forward to the next tax year, and so on — subject always to the eight-year ceiling.
Sub-section (2) — the eight-year limit
No loss shall be carried forward under this section for more than eight tax years immediately succeeding the tax year for which the loss was first computed. Track each year's loss separately, because each has its own expiry.
Why the short-term / long-term distinction matters more now
Under the Income-tax Act, 2025 the rates differ sharply: short-term equity gains are taxed at 20% under section 196, while long-term gains are at 12.5% under sections 197 and 198. A brought-forward short-term loss is therefore the more valuable asset, because it can be applied against either kind of gain — including the higher-taxed short-term gains.
No escape into other heads
Section 109(2) prevents any set off of capital losses against other heads, in the year of the loss or later. A taxpayer with capital losses and no future capital gains simply loses the benefit after eight years.
Worked example
Losses arise in tax year 2026-27 and gains in 2027-28.
| Brought forward from 2026-27 | Amount | 2027-28 gains available | Set off under section 111 |
|---|---|---|---|
| Short-term capital loss | ₹3,00,000 | Short-term gain ₹1,80,000 (taxed at 20%) and long-term gain ₹4,00,000 (taxed at 12.5%) | May be set off against either; best applied against the ₹1,80,000 short-term gain first |
| Long-term capital loss | ₹2,50,000 | Long-term gain ₹4,00,000 | Only against the long-term gain — sub-section (1)(a)(ii) |
Applying the short-term loss to the short-term gain first saves tax at 20%; applying it to long-term gains would save only 12.5%. After setting ₹1,80,000 of the short-term loss against the short-term gain, ₹1,20,000 of short-term loss and ₹2,50,000 of long-term loss remain to meet the ₹4,00,000 long-term gain, leaving ₹30,000 of long-term gain taxable.
Both losses expire after tax year 2034-35, and neither survives at all unless the 2026-27 return was filed by the section 263(1) due date.
Compliance checklist and due dates
- File the loss return by the section 263(1) due date — section 121 is unforgiving.
- Maintain a year-wise schedule of short-term and long-term losses with their eight-year expiry dates.
- Apply brought-forward short-term losses against short-term gains first, where both kinds of gain exist, because the rate saved is higher.
- Never set a long-term loss against short-term gains.
- Do not expect any inter-head relief; section 109(2) rules it out.
- Remember that section 198's ₹1,25,000 threshold applies to gains, and losses are set off against the gains before that threshold is considered — read section 198 for the interaction.
Common mistakes
- Setting a brought-forward long-term loss against short-term gains.
- Using short-term losses against long-term gains when short-term gains taxed at 20% were also available.
- Losing the carry forward through a late return.
- Failing to track the eight-year expiry per year of loss and finding an old loss has lapsed.
- Expecting capital losses to reduce salary or business income.
This is an explanatory guide, not tax advice, and it does not reproduce the section in full. Read the bare text of the section before you rely on it, and check for later amendments, the Income-tax Rules made under the new Act, and CBDT circulars and notifications.