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Tutorial 12 · Part 6 of 6 · Intermediate · 12 min read

Capital Losses, Advance Tax and Reporting

The last part of the series is about what happens after the gain is computed — setting off losses in the right order, carrying forward what is left, paying the tax in the correct quarter, and getting it into the return without triggering a notice. It closes with the twelve mistakes that cost people the most.

Scope and date. Written for FY 2025-26 (AY 2026-27) and FY 2026-27, current as at July 2026. Capital gains is one of the most fact-sensitive areas of Indian tax law — the same sale can be taxed very differently depending on dates, residential status and documentation. Treat this as a thorough map, not as advice on your transaction. For anything material, confirm the position with your CA and against the bare Act.

Capital Gains — a 6-part series
  1. 1. Capital Gains Basics
  2. 2. Calculating the Gain
  3. 3. Rates & Special Regimes
  4. 4. Exemptions 54 to 54GB
  5. 5. Property Sales
  6. 6. Losses, Advance Tax & ITR  — you are here

The Two Set-Off Rules

Section 74 (Section 111). Two rules govern everything:

LossCan be set off against
Short-term capital lossShort-term and long-term capital gains
Long-term capital lossLong-term capital gains only

The asymmetry is the whole point: a short-term loss is more useful than a long-term one, because it can go against either kind of gain.

What Losses Cannot Do

  • Cannot be set off against salary, business income, house property or income from other sources. Capital losses live and die inside the capital gains head.
  • Cannot be claimed where the corresponding gain would have been exempt — if the income would not have been taxable, the loss is not allowable.
  • Crypto losses cannot be set off against anything at all, including other crypto gains, and cannot be carried forward.
  • A loss cannot be set off against the ₹1.25 lakh exempt slice of Section 112A gains — that portion is not taxable to begin with.

Carry Forward — Eight Years

Unabsorbed capital losses carry forward for eight assessment years immediately following the year the loss was computed. In each of those years the same two rules apply: a carried-forward short-term loss can meet either kind of gain, a carried-forward long-term loss only a long-term gain.

Carry forward requires filing your return by the Section 139(1) due date. File late and the loss is gone permanently — there is no relief for this in the ordinary course. If you have a loss year, file on time even when no tax is payable and nothing else compels you to file. This is the single most expensive avoidable mistake in this entire series.

Ordering Your Set-Offs

Because a short-term loss can absorb either kind of gain, where you apply it changes your tax.

Worked example

In one year: short-term loss on equity ₹2,00,000; long-term gain on property ₹5,00,000; long-term equity gain ₹1,50,000.

  • Set the short-term loss against the property gain — taxed at 12.5% with no exempt slice. Property gain falls to ₹3,00,000.
  • The equity gain of ₹1,50,000, less the ₹1,25,000 annual threshold, leaves only ₹25,000 taxable.

Had the loss been applied to the equity gain instead, most of it would have been wasted absorbing income that was already exempt. Same loss, less tax — purely from ordering. The general rule: apply losses to the highest-taxed gains that carry no exemption.

Booking Losses Deliberately

If you are sitting on an unrealised loss and have realised gains in the same year, selling the loss-making holding before 31 March converts a paper loss into a usable one. Two cautions:

  • Do it on genuine market transactions with contract notes. Selling and instantly repurchasing the same security purely to book a loss invites scrutiny.
  • It only helps if you have gains to absorb it, or expect gains within the eight-year window.

Advance Tax on Capital Gains

Capital gains form part of your advance tax liability, with one sensible relaxation: because you cannot predict a gain that has not happened, the instalment schedule applies from the quarter in which the gain arises. There is no Section 234C interest for failing to estimate a capital gain in an earlier instalment — provided you pay it in the remaining instalments, or by 31 March.

The relief is only from 234C. Interest under Section 234B still applies if total advance tax paid falls short of 90% of the assessed liability. Sell a property in February and the tax has to be paid by 31 March — not on filing day in July.

See Advance Tax — Who Pays and When for the full schedule and interest computation.

TDS and Credit

ProvisionWhenRate
194-IABuyer of immovable property from a resident, where consideration or stamp duty value is ₹50 lakh or more1%, via Form 26QB. No TAN needed.
195Any payment to a non-resident sellerApplicable capital gains rate plus surcharge and cess — on the whole consideration unless a Section 197 certificate is obtained
194STransfer of a virtual digital asset1%

TDS deducted is a credit, not the final tax. Claim it in your return against the actual liability — and check it appears in Form 26AS before you file.

Reporting in the ITR

  • Capital gains cannot be reported in ITR-1 or ITR-4. Use ITR-2 (no business income) or ITR-3 (with business income).
  • Schedule CG carries the computation, split by asset type and by period.
  • Schedule 112A requires scrip-wise reporting for grandfathered listed equity — ISIN, quantity, sale value, cost and the 31 January 2018 fair market value. Download the statement from your broker or RTA; reconstructing it by hand is misery.
  • Gains must be reported quarter-wise, because that drives the Section 234C computation.
  • Exemptions claimed under Sections 54, 54EC, 54F and the rest are disclosed within Schedule CG, along with CGAS deposit details where applicable.
  • Carried-forward losses go in Schedule CFL, and must be carried consistently from year to year — a loss that disappears from one year's CFL cannot be revived later.

Reconciling with AIS

Every property registration, every mutual fund redemption and every large securities transaction is already reported to the department in your Annual Information Statement. A mismatch between AIS and your return — not the gain itself — is the most common trigger for a notice.

Reconcile before you file, not after

iAccounting reconciles the Income-Tax AIS JSON against your books directly — free, no OTP required. Differences are listed line by line so you can fix them before the return goes in, rather than answering a notice six months later. See AIS Reconciliation.

Recording It in Your Books

A capital gain is a tax computation, but the underlying sale still has to be recorded properly — and getting the book entry right is what makes the tax computation easy a year later.

  1. Keep the asset in a fixed asset ledger from the day you buy it, with purchase cost, stamp duty and registration capitalised into it.
  2. Post improvements to the same ledger, dated, with the bill attached. This is your cost-of-improvement evidence.
  3. On sale, pass a journal — bank or receivable debited, asset ledger credited with its book value, difference to a "Profit on Sale of Asset" ledger. Keep that ledger separate from trading income so it does not pollute operating profit.
  4. Record transfer expenses separately — brokerage, legal fees — rather than netting them into the receipt, so they are visible when you compute the gain.
  5. Reconcile with AIS before filing.

In iAccounting you can pass the whole entry conversationally: press F12 and say "sold the Andheri office for 85 lakh, received in HDFC, book value 20 lakh, brokerage 85 thousand" — the AI Assistant drafts the journal with the asset ledger, the bank leg, the brokerage and the profit on sale, and you approve it before anything posts. See The AI Assistant — Complete Guide. Note that the software records the transaction and the book profit; the taxable capital gain, with indexation or grandfathering, remains a separate computation you or your CA make from these figures.

Twelve Common Mistakes

  1. Filing late and losing the loss. Carry forward requires filing by the due date. No exceptions in the ordinary course.
  2. Assuming inheritance resets the cost. It does not — you take the previous owner's cost and holding period.
  3. Reinvesting only the gain under Section 54F. That section needs the whole net consideration.
  4. Missing the 54EC six-month window. Six months from the date of transfer, and not extendable.
  5. Selling below circle rate and forgetting Section 50C — and that the buyer may be taxed on the same gap.
  6. Deducting STT. It is expressly not allowable.
  7. Treating debt fund gains as long-term. Post-April-2023 purchases never qualify.
  8. Expecting the 87A rebate to wipe out tax on special-rate capital gains. It does not apply to them.
  9. Paying the tax only at filing. Advance tax is due in the quarter the gain arises; 234B interest follows regardless.
  10. Deducting 1% TDS when the seller is an NRI. Section 195 applies, not 194-IA, and the buyer carries the liability.
  11. Losing the improvement bills. An undocumented cost of improvement is a disallowed one.
  12. Not reconciling with AIS. The department already has the transaction; the mismatch is what triggers the notice.

What's Next?

Keep your books ITR-ready year-round

iAccounting maintains your fixed asset ledgers, depreciation schedules and AIS reconciliation automatically — so the capital gains computation is a lookup, not an archaeology project.

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