How to set off mutual fund capital losses in ITR
Setting off mutual fund capital losses against gains reduces your taxable LTCG / STCG. Two key rules govern: within-head offset (Section 70) and cross-head offset (Section 71). For most retail MF investors, only within-head matters: losses from MFs offset gains from MFs (or other capital assets), not salary income.
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Step-by-step procedure
See the procedure infobox above.
Within-head offset rules (Section 70)
| Loss type | Can offset against |
|---|---|
| Short-term capital loss (STCL) | Any other STCG (equity or non-equity) OR LTCG |
| Long-term capital loss (LTCL) | Only LTCG (cannot offset STCG) |
Rationale: STCL is treated more flexibly because STCG is taxed at higher rates; LTCL is restricted to maintain symmetry.
Cross-head offset (Section 71)
| Loss type | Cross-head offset allowed? |
|---|---|
| Capital losses (STCL or LTCL) | No (cannot offset salary, business, or other heads) |
This is why “tax-loss harvesting” benefits are limited to capital gains; you can’t reduce your salary tax through MF losses.
Section 94(7) wash-sale rule
To prevent artificial loss creation:
If you:
- Buy MF units, then
- Receive IDCW (declared within 3 months pre / 3 months post), then
- Sell the units within 3 months pre / 3 months post the IDCW record date,
- The capital loss to the extent of IDCW is disallowed.
Effectively, you can’t claim a loss equal to a dividend you just collected from the same scheme. Plan tax-loss harvesting to avoid this trap.
Worked example
FY 2024-25 capital activity:
- Equity MF A: LTCG Rs 1 lakh.
- Equity MF B: LTCL Rs 60,000.
- Debt MF C: STCG Rs 50,000.
- Equity MF D: STCL Rs 30,000.
Set-off computation:
- LTCG Rs 1L vs LTCL Rs 60k = Net LTCG Rs 40k.
- STCG Rs 50k vs STCL Rs 30k = Net STCG Rs 20k.
LTCG (within exemption Rs 1.25L): Tax Rs 0. STCG Rs 20k at 20%: Tax Rs 4,000.
Total: Rs 4,000 vs original Rs 12,500 + STCG. Savings: ~Rs 8,500.
Carry-forward to subsequent FYs
Net unutilised capital loss after current-FY offset:
- Reported in Schedule CFL.
- Carried forward for 8 subsequent FYs.
- Used against future capital gains.
Long-term losses carry over as long-term. Short-term losses carry over as short-term.
Practical tax-loss harvesting
| Strategy | When |
|---|---|
| Realise embedded losses at FY-end | If anticipated gains in next FY |
| Wash-sale protection | Don’t re-buy same scheme in 3-month window |
| Switch to similar scheme | Maintain exposure with different AMC’s scheme |
| Hold during recovery | If conviction in scheme remains |
See also
- How to report MF capital gains in ITR
- How to fill Schedule CG (MF)
- How to carry forward MF capital losses
- How to apply grandfathering rule LTCG (MF)
- How to handle switch tax in ITR
- How to handle SWP tax in ITR
- How to exit MF tax-efficiently
- How to choose ITR form for MF
- How to revise ITR (MF)
- How to tax-loss harvesting (Zerodha)
- Tax-loss harvesting
- Section 70 (intra-head set-off)
- Section 71 (inter-head set-off)
- Section 94(7) wash sale
- Section 112A (LTCG)
- Section 111A (STCG)
- Section 50AA (debt MF taxation)
- Equity mutual fund taxation in India
- Debt mutual fund taxation (Finance Act 2023)
- Capital gains statement (MF)
- Mutual funds in India
- AMFI
- SEBI
External references
References
- Income Tax Act, 1961, Sections 70, 71, 74, 94(7).
- Income Tax Act, 1961, Sections 111A, 112A.
- AMFI Best Practice Guidelines on tax disclosure.