New Income-tax Act, 2025: What happens to your carried-forward stock and mutual fund losses?

Accordingly, investors carrying forward losses from shares and mutual funds are not expected to lose the benefit of such losses merely due to the transition from the Income-tax Act, 1961 (ITA 1961).

Under the existing framework, which broadly continues under the new law, short-term capital losses (STCL) arising from shares and mutual funds can be set off against both short-term and long-term capital gains, while long-term capital losses (LTCL) may generally be adjusted only against long-term capital gains. 

Such losses can ordinarily be carried forward for up to eight assessment years, subject to timely filing of the income-tax return.

Income Tax Act 2025: What happens to your carried-forward stock and MF losses? 

Importantly, Section 536 of the ITA 2025 contains a transition safeguard for carried-forward capital losses arising under the repealed ITA 1961. 

It provides that capital losses, whether short-term or long-term, computed before 1 April 2026, may continue to be carried forward and set off in accordance with the earlier law against capital gains under the new Act for the balance period of up to 8 financial years from the year in which such loss was first computed.

CA (Dr.) Suresh Surana says, for investors, this means that transitional losses from stocks and mutual funds are expected to retain their value as tax-efficient tools against future gains despite the legislative transition. The continuity mechanism under the new law appears to ensure that taxpayers are not disadvantaged merely because of a change in statutory structure.

Understanding STCG and LTCG: How capital gains are taxed in India?

Short-Term Capital Gains (STCG)
If you sell equity shares within 12 months, the profit is treated as short-term capital gains (STCG). These gains are taxed at 20% under Section 111A of the Income-tax Act, 1961.

If you have short-term capital losses, you can use them to offset both STCG and long-term capital gains (LTCG). This helps reduce your overall taxable income and lowers your tax outgo.

Long-Term Capital Gains (LTCG)
If you hold equity shares for more than 12 months, the profit is treated as long-term capital gains (LTCG). Gains above Rs 1.25 lakh in a financial year from listed shares and equity mutual funds are taxed at 12.5% (without indexation benefits).

Long-term capital losses, however, can only be set off against long-term capital gains, not short-term gains.

Important point

“Under Section 112A, long-term capital gains (LTCG) up to Rs 1.25 lakh in a financial year are tax-free. So, before using your long-term capital losses, check how much of your gains fall within this tax-free limit. Any gains up to Rs 1.25 lakh are not taxed anyway, so setting off losses against them may not give any extra benefit,” said CA (Dr.) Suresh Surana. 

Using losses after considering this limit helps you reduce tax more effectively and make better use of your capital losses.

How does tax loss harvesting help reduce your stock market tax liability? 

If your stock market investments ended FY 2025–26 in a loss, it’s not necessarily all bad news. While filing your ITR for AY 2026–27, you may be able to use those losses to lower your tax.

This is called tax loss harvesting. It simply means using losses from shares, mutual funds, ETFs, and other investments to offset your capital gains, so you pay less tax overall.

Investors frequently experience significant losses on their investments when the stock market falls. However, tax loss harvesting, a strategy that allows investors to offset capital losses against capital gains and lower their overall tax liability, can be used to strategically leverage these losses. 

Investors can reduce taxable income and neutralize gains from other investments by selling underperforming assets at a loss. Although this approach is frequently used at the end of the financial year, it may also be incorporated into routine portfolio management for continuous tax optimization.

However, one important compliance condition remains unchanged, i.e., taxpayers must file their income-tax returns within the prescribed due dates to preserve the right to carry forward capital losses. Failure to file a timely return may result in the lapse of this benefit, even where the losses are genuine and documented, commented CA (Dr.) Suresh Surana. 

If your capital losses are higher than your gains in a financial year, you don’t lose that benefit. The unused losses can be carried forward for up to 8 years. However, you can claim this benefit only if you report the loss in your Income Tax Return (ITR) on time. In the coming years, you can use these carried-forward losses to reduce your capital gains and lower your tax.

As per the repeal and savings provision in the new Act and FAQs issued by CBDT, it is clear that losses arising pre April 2026 can be offset against gains arising from April 2026. The set off rules are pretty much the same and in fact provide more clarity in the case of setting off short-term losses and gains from different asset classes, says Rajesh H. Gandhi, Partner, Deloitte India. 

Key points on tax loss harvesting

• Short-term capital losses can be set off against both short-term and long-term capital gains.
• Long-term capital losses can be set off only against long-term capital gains.

Because of this rule, tax loss harvesting helps investors plan better and reduce taxes by balancing gains and losses smartly.

Short-term capital losses (STCL) can be used to offset both short-term and long-term capital gains. But long-term capital losses (LTCL) can only be used to offset long-term capital gains.

If these are reported incorrectly, the tax department may reject the claim or issue a notice.

Losses from investments like listed shares, equity mutual funds, ETFs, and other securities can also be carried forward to future years and used to reduce tax on future capital gains.

However, just making a loss is not enough; you can carry it forward only if you file your income tax return on time and report it correctly.

Overall, while the nomenclature and drafting structure of India’s tax law may have changed, the continuity of carried-forward stock and mutual fund losses has been preserved under the ITA  2025.

Disclaimer: This article is for informational purposes only and does not constitute professional tax advice. Tax laws and regimes are subject to frequent changes by the government. Readers should verify details with official Income Tax Department notifications or consult a Chartered Accountant before making any financial decisions.   

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