One-time capital gains set-off dropped in latest version of Income Tax Act 2025:
How it impacts your tax bill
Feb 10, 2026
Synopsis
The final Income Tax Act, 2025 has removed a one-time provision that allowed brought-forward long-term capital losses to be set off against short-term capital gains. This change reverts to the restrictions of the Income Tax Act, 1961, limiting LTCL set-off only against LTCG, impacting taxpayers' ability to reduce their tax liabilities.
The previous draft of the Income Tax Act, 2025 had a beneficial provision that has been taken out in the most recent version. This provision was a one-time relief for individuals looking to reduce their capital gains tax by mimizing their short-term capital gains (STCG).
In technical terms, the earlier version of Income Tax Bill, 2025, allowed to carry forward any long-term capital loss (LTCL) incurred up to March 31, 2026, to be set-off against any short-term capital gains (STCG). If you look closely, the word is ‘any’, so it means that any LTCL if incurred under the Income Tax Act, 1961 can be set-off with STCG.
But the latest version of the Income Tax Act, 2025 has removed this provision.
Old article which mentioned the benefit which is now removed: One-time set-off of long-term capital loss against STCG: New income tax bill 2025 allows this from tax year 2026-27 onwards
What was the beneficial provision which the new version of Income Tax Act, 2025 removed?
Position under the Original Income-tax Bill, 2025
Clause 536 (n) of the savings provisions in the original Income Tax Bill, 2025 provided that any amount of loss under the head “Capital gains”, whether long-term or short-term, brought forward from periods prior to 1 April 2026, “shall be set off and carried forward against the income under the head ‘Capital gains’” computed under the new Act.
Accordingly, the said provision did not mandate adherence to the manner of set-off prescribed under Section 74 of the Income-tax Act, 1961.
Chartered Accountant (Dr.) Suresh Surana says that the absence of restrictive language gave rise to a reasonable interpretation that brought forward LTCL could be set off against STCG under the new regime, as a transitional, one-time relaxation.
Position under the Final Income-tax Act, 2025
However, the corresponding savings clause as enacted (and revised vide the Revised Income Tax Bill 2025) now provides that such brought forward capital losses “shall be carried forward and set off, in accordance with the manner provided in the repealed Income-tax Act” against capital gains under the new Act.
Surana says that this insertion is important as by expressly linking the set-off mechanism to the repealed Income-tax Act, 1961, the final provision re-imports the restrictions contained in Section 74, under which:
• LTCL can be set off only against LTCG, and
• STCL alone may be set off against both LTCG and STCG.
Accordingly, the final Income-tax Act, 2025 does not retain the broader set-off flexibility that may have been inferred from the language of the original Bill. Thus, the legislative change clarify that:
• There is no one-time or transitional relaxation permitting set-off of brought forward LTCL against STCG, and
• Brought forward capital losses from the pre-2026 regime must be utilised strictly in accordance with the section 74 of the Income-tax Act, 1961
As a result of this removal, what benefits can taxpayers miss out on?
Surana says that due to the withdrawal of the broader transitional set-off provision in the final Income-tax Act, 2025, taxpayers will no longer be able to set off brought forward long-term capital losses (LTCL) against short-term capital gains (STCG) from tax year 2026–27 onwards. Utilisation of LTCL (under the repealed Act) will continue to be restricted to long-term capital gains in line with Section 74 of the Income-tax Act, 1961.
This proposed change, the New Income Tax Act 2025 set-off provisions, has been aligned with that of the Income-Tax Act 1961 and similar provisions governing carry forward and set off would continue to govern.
Surana says that the position adopted in the final Income-tax Act, 2025 is aligned with the long-standing framework under the Income-tax Act, 1961, particularly the set-off of capital losses under Section 74.
Surana says: “By expressly requiring that brought forward capital losses be carried forward and set off in accordance with the repealed Act, the final legislation ensures continuity, certainty, and consistency in the capital gains regime.”
How the benefit was given and then taken away when compared to the 1961 tax act?
The old Income Tax Act, 1961 allowed 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).
The earlier version of the Income Tax Act, 2025 had continued this restriction for LTCL incurred after April 1, 2026, but the ‘Repeal and Saving’ clause in Section 536 (specifically 536(2)(n)) had permitted the set-off of LTCL incurred until March 31, 2026, against any capital gains under the previous version of the Income Tax Act, 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.
[The Economic Times]
