I have a long-term capital loss and short-term capital gains this year, and also a brought-forward long-term loss. Which loss can go against which gain, and for how long can I carry it?
A short-term capital loss can be set off against any capital gain, short-term or long-term; a long-term capital loss can only be set off against a long-term capital gain. That asymmetry holds both within the year, under s.70(2) and s.70(3), and on carry forward, under s.74(1)(a) and s.74(1)(b); the carry forward is limited to eight assessment years by s.74(2). The present form of both sections was put in place by the Finance Act 2002 with effect from 1 April 2003, that is Assessment Year 2003-04.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2003-04-01, reported as Section 70 substituted, and section 74(1) substituted and section 74(3) omitted, by the Finance Act, 2002, with effect from 1 April 2003, that is Assessment Year 2003-04. It bears on section 70, section 70(2), section 70(3), section 74, section 74(1), section 74(2), section 71, section 72, section 80, section 139(3), section 50 of the Income Tax Act 1961, in Capital Gains and How Tax Law Is Read matters.
The rule is often stated as 'long-term against long-term' and then applied loosely, and the loose version is wrong in three ways. First, it is not symmetrical: s.70(2) lets a short-term loss go against income from 'any other capital asset', while s.70(3) confines a long-term loss to 'any other capital asset not being a short-term capital asset'. A short-term loss may therefore be set against a long-term gain, and clients who assume the reverse is also true lose money. Second, the asymmetry is not confined to carry forward: it operates within the year under s.70 as well as across years under s.74, and the drafting of s.70(2) and (3) and of s.74(1)(a) and (b) is deliberately parallel. Third, and this is where the fights are, the labels 'short-term' and 'long-term' are attached to the ASSET, not to the computation. Section 50 deems the gain on a depreciable asset to be capital gains arising from the transfer of a short-term capital asset, but it is a computation provision, and the Bombay High Court in CIT v. ACE Builders Pvt. Ltd. held the fiction confined to ss.48 and 49 — so a gain computed under s.50 on an asset actually held for more than the qualifying period keeps its long-term character for provisions outside the computation, and the Mumbai Tribunal in Manali Investments applied that to s.74. A further trap: a capital loss is outside s.71 altogether, so it can never be set off against income under any other head, and s.71 in its turn does not permit a loss under any other head to be set off against capital gains. Finally, the eight-year limit in s.74(2) runs from the assessment year for which the loss was first computed, and s.80 requires the loss year's return to have been filed in accordance with s.139(3) or the loss is not carried forward at all.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
Read aloud by your device. Press again to stop.
Not applicable — statutory text. Section 70(1) allows a loss from any source under any head other than 'Capital gains' to be set off against income from any other source under the same head. Section 70(2) allows a loss computed under ss.48 to 55 in respect of any short-term capital asset to be set off against the income similarly computed in respect of any other capital asset. Section 70(3) allows a loss so computed in respect of any capital asset other than a short-term capital asset to be set off only against the income similarly computed in respect of any other capital asset not being a short-term capital asset. Section 74(1) provides that where the net result of the computation under the head 'Capital gains' is a loss, the whole loss shall be carried forward to the following assessment year, and (a) in so far as it relates to a short-term capital asset it shall be set off against income under the head 'Capital gains' assessable for that year in respect of any other capital asset; (b) in so far as it relates to a long-term capital asset it shall be set off against such income in respect of any other capital asset not being a short-term capital asset; and (c) any balance is carried forward to the following assessment year and so on. Section 74(2) limits the carry forward to eight assessment years immediately succeeding the assessment year for which the loss was first computed. Section 74(3) stands omitted.
Statutory position — no holding is asserted; this entry reproduces statutory text. Within the year, a short-term capital loss may be set off against the income computed in respect of any other capital asset (s.70(2)), while a long-term capital loss may be set off only against the income computed in respect of any other capital asset not being a short-term capital asset (s.70(3)). On carry forward the same asymmetry is reproduced by s.74(1)(a) and s.74(1)(b), and s.74(2) limits the carry forward to eight assessment years immediately succeeding the assessment year for which the loss was first computed. This form of ss.70 and 74 applies from Assessment Year 2003-04.
Not applicable — statutory text. The point of construction worth marking is that ss.70(3) and 74(1)(b) describe the restriction by reference to the ASSET — 'any other capital asset not being a short-term capital asset' — and not by reference to how the gain on that asset happens to be computed. That is the textual foundation of the ACE Builders line, under which the deeming in s.50 that a gain on a depreciable asset is capital gains arising from the transfer of a short-term capital asset is confined to the computation provisions, ss.48 and 49, and does not convert the asset itself into a short-term capital asset. The commencement is taken from the departmental pages for both sections stamped Year 2002, which set out the Finance Act 2002 substitutions in terms and date them 1 April 2003.
(b) in so far as such loss relates to a long-term capital asset, it shall be set off against income, if any, under the head "Capital gains" assessable for that assessment year in respect of any other capital asset not being a short-term capital asset;
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppA short-term capital loss can be set off against any capital gain, short-term or long-term; a long-term capital loss can only be set off against a long-term capital gain. That asymmetry holds both within the year, under s.70(2) and s.70(3), and on carry forward, under s.74(1)(a) and s.74(1)(b); the carry forward is limited to eight assessment years by s.74(2). The present form of both sections was put in place by the Finance Act 2002 with effect from 1 April 2003, that is Assessment Year 2003-04. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 70, section 70(2), section 70(3), section 74, section 74(1), section 74(2), section 71, section 72, section 80, section 139(3), section 50 of the Income Tax Act 1961. It is reported as Section 70 substituted, and section 74(1) substituted and section 74(3) omitted, by the Finance Act, 2002, with effect from 1 April 2003, that is Assessment Year 2003-04. The rule is often stated as 'long-term against long-term' and then applied loosely, and the loose version is wrong in three ways. First, it is not symmetrical: s.70(2) lets a short-term loss go against income from 'any other capital asset', while s.70(3) confines a long-term loss to 'any other capital asset not being a short-term capital asset'. A short-term loss may therefore be set against a long-term gain, and clients who assume the reverse is also true lose money. Second, the asymmetry is not confined to carry forward: it operates within the year under s.70 as well as across years under s.74, and the drafting of s.70(2) and (3) and of s.74(1)(a) and (b) is deliberately parallel. Third, and this is where the fights are, the labels 'short-term' and 'long-term' are attached to the ASSET, not to the computation. Section 50 deems the gain on a depreciable asset to be capital gains arising from the transfer of a short-term capital asset, but it is a computation provision, and the Bombay High Court in CIT v. ACE Builders Pvt. Ltd. held the fiction confined to ss.48 and 49 — so a gain computed under s.50 on an asset actually held for more than the qualifying period keeps its long-term character for provisions outside the computation, and the Mumbai Tribunal in Manali Investments applied that to s.74. A further trap: a capital loss is outside s.71 altogether, so it can never be set off against income under any other head, and s.71 in its turn does not permit a loss under any other head to be set off against capital gains. Finally, the eight-year limit in s.74(2) runs from the assessment year for which the loss was first computed, and s.80 requires the loss year's return to have been filed in accordance with s.139(3) or the loss is not carried forward at all. If it applies to you, the first step is this: Classify each loss and each gain by the nature of the ASSET transferred — long-term or short-term — before touching the computation, and keep the classification separate from any deeming provision that governs how the figure is worked out.
Not applicable — statutory text. Section 70(1) allows a loss from any source under any head other than 'Capital gains' to be set off against income from any other source under the same head. Section 70(2) allows a loss computed under ss.48 to 55 in respect of any short-term capital asset to be set off against the income similarly computed in respect of any other capital asset. Section 70(3) allows a loss so computed in respect of any capital asset other than a short-term capital asset to be set off only against the income similarly computed in respect of any other capital asset not being a short-term capital asset. Section 74(1) provides that where the net result of the computation under the head 'Capital gains' is a loss, the whole loss shall be carried forward to the following assessment year, and (a) in so far as it relates to a short-term capital asset it shall be set off against income under the head 'Capital gains' assessable for that year in respect of any other capital asset; (b) in so far as it relates to a long-term capital asset it shall be set off against such income in respect of any other capital asset not being a short-term capital asset; and (c) any balance is carried forward to the following assessment year and so on. Section 74(2) limits the carry forward to eight assessment years immediately succeeding the assessment year for which the loss was first computed. Section 74(3) stands omitted. The matter was decided on 2003-04-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Statutory position — no holding is asserted; this entry reproduces statutory text. Within the year, a short-term capital loss may be set off against the income computed in respect of any other capital asset (s.70(2)), while a long-term capital loss may be set off only against the income computed in respect of any other capital asset not being a short-term capital asset (s.70(3)). On carry forward the same asymmetry is reproduced by s.74(1)(a) and s.74(1)(b), and s.74(2) limits the carry forward to eight assessment years immediately succeeding the assessment year for which the loss was first computed. This form of ss.70 and 74 applies from Assessment Year 2003-04.
Not applicable — statutory text. The point of construction worth marking is that ss.70(3) and 74(1)(b) describe the restriction by reference to the ASSET — 'any other capital asset not being a short-term capital asset' — and not by reference to how the gain on that asset happens to be computed. That is the textual foundation of the ACE Builders line, under which the deeming in s.50 that a gain on a depreciable asset is capital gains arising from the transfer of a short-term capital asset is confined to the computation provisions, ss.48 and 49, and does not convert the asset itself into a short-term capital asset. The commencement is taken from the departmental pages for both sections stamped Year 2002, which set out the Finance Act 2002 substitutions in terms and date them 1 April 2003. In the words reproduced by the source cited on this page: "(b) in so far as such loss relates to a long-term capital asset, it shall be set off against income, if any, under the head "Capital gains" assessable for that assessment year in respect of any other capital asset not being a short-term capital asset;"
It was decided by the CBDT Circulars & Instructions on 2003-04-01 and is reported as Section 70 substituted, and section 74(1) substituted and section 74(3) omitted, by the Finance Act, 2002, with effect from 1 April 2003, that is Assessment Year 2003-04. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 70, section 70(2), section 70(3), section 74, section 74(1), section 74(2), section 71, section 72, section 80, section 139(3), section 50, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Statutory position — no holding is asserted; this entry reproduces statutory text. Within the year, a short-term capital loss may be set off against the income computed in respect of any other capital asset (s.70(2)), while a long-term capital loss may be set off only against the income computed in respect of any other capital asset not being a short-term capital asset (s.70(3)). On carry forward the same asymmetry is reproduced by s.74(1)(a) and s.74(1)(b), and s.74(2) limits the carry forward to eight assessment years immediately succeeding the assessment year for which the loss was first computed. This form of ss.70 and 74 applies from Assessment Year 2003-04. It arises in Capital Gains and How Tax Law Is Read matters, on section 70, section 70(2), section 70(3), section 74, section 74(1), section 74(2), section 71, section 72, section 80, section 139(3), section 50 of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Within the year, apply s.70(2) and s.70(3) in that order: set short-term losses against whichever gains are most advantageous, since s.70(2) permits them against any other capital asset, and only then set long-term losses against long-term gains. On carry forward, apply s.74(1)(a) and s.74(1)(b) with the same asymmetry, and count the eight years in s.74(2) from the assessment year for which the loss was FIRST computed. Where the gain arises on a depreciable asset held for longer than the qualifying period, do not concede that the gain is short-term for the purpose of s.74 merely because it is computed under s.50; run the ACE Builders argument that the s.50 fiction is confined to ss.48 and 49. Never set a capital loss against income under another head — s.71 does not permit it — and check that the loss year's return satisfied s.139(3) before claiming the carry forward at all. For an assessment year up to and including AY 2002-03, do not use this text: s.74(1) then made no distinction between short-term and long-term losses on carry forward, and s.74(3) contained a separate transitional rule for pre-1988 losses.
Still good law. This is the statute, not a decision about it. The current texts of ss.70 and 74 were read on 8 September 2026 from departmental pages carrying the correct headings and the stamp Year 2025. No amendment to either section later than the Finance Act 2002 substitution was found on those pages; the pages print no footnote for the substituted operative sub-sections, though the Year 2025 s.74 page does record the omission of sub-section (3) by the Finance Act 2002 w.e.f. 1-4-2003, so the absence of a later amendment rests on the identity of the Year 2002 and Year 2025 texts and has NOT been checked against the Finance Acts of the intervening years. The interaction with s.50, stated above by reference to CIT v. ACE Builders Pvt. Ltd. and Manali Investments, is judicial gloss and not statutory text. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
This is a statutory entry, not a decided case. decided_on is the commencement date — 1 April 2003, Assessment Year 2003-04 — and not the date of any decision. The current texts of s.70 and s.74 were read from departmental section pages both carrying the correct headings ('Set off of loss from one source against income from another source under the same head of income' and 'Losses under the head "Capital gains"') and both stamped Year 2025; neither page prints an amendment footnote for the substitution of s.70 or of s.74(1); the Year 2025 page for s.74 does, however, print sub-section (3) as '[Omitted by the Finance Act, 2002, w.e.f. 1-4-2003.]', which corroborates the commencement date on the current page itself. The commencement was established from the departmental pages for the same two sections stamped Year 2002, which print the then-current text alongside the words 'The following section 70 shall be substituted for the existing section 70 by the Finance Act, 2002, w.e.f. 1-4-2003' and 'The following sub-section (1) shall be substituted for the existing sub-section (1) of section 74 by the Finance Act, 2002, w.e.f. 1-4-2003', together with footnote 49a, 'Sub-section (3) shall be omitted by the Finance Act, 2002, w.e.f. 1-4-2003'; the substituted text printed on those 2002 pages is word for word the text printed on the 2025 pages. Those archived pages are used here only to DATE the amendment, not to state the current position. Note that the Year 2002 page for s.70 carries a Taxmann footnote reference; only the statutory text and the commencement wording were taken from it. The exemption route in s.10(38), which for years up to AY 2018-19 made certain long-term gains exempt and so raised the question whether the corresponding loss survived at all, is not addressed here and is covered by separate entries in this library. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Statutory position — no holding is asserted; this entry reproduces statutory text. Within the year, a short-term capital loss may be set off against the income computed in respect of any other capital asset (s.70(2)), while a long-term capital loss may be set off only against the income computed in respect of any other capital asset not being a short-term capital asset (s.70(3)). On carry forward the same asymmetry is reproduced by s.74(1)(a) and s.74(1)(b), and s.74(2) limits the carry forward to eight assessment years immediately succeeding the assessment year for which the loss was first computed. This form of ss.70 and 74 applies from Assessment Year 2003-04.
TaxSphere, “Statutory position — the capital-loss asymmetry: sections 70(2), 70(3) and 74(1) from AY 2003-04”, https://taxnotice.vittsphere.com/caselaw/case/capital-loss-set-off-asymmetry-sections-70-2-70-3-and-74-1-from-ay-2003-04/ (validity last checked 2026-09-08)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
I sold depreciable assets I had held for over three years and the whole block ceased to exist, so the gain was computed under section 50. The Assessing Officer says the gain is short-term and refuses to set it against my brought-forward long-term capital loss. Is he right?
The e-filing utility forces my client's STT-paid short-term loss against STT-paid gains first and will not let him claim the sequence he wants. Is his only option to file the return the utility's way and argue later?
My AY 2020-21 return was 72 days late because of Covid and the short-term capital loss was refused. Four years on I want to set that loss off against this year's gains. Can I argue the delay in the current year's appeal?
I filed this year's return late under section 139(4). The Assessing Officer has now refused to carry forward a capital loss and unabsorbed depreciation that both came from the earlier year, whose return was on time. Can he do that?
