New Income tax bill: Get one-time set off of long-term capital loss against short-term capital gains from tax year 2026–27

A one-time tax relief proposed under the new Income Tax Bill, 2025 could significantly reduce capital gains tax liabilities for many individual taxpayers. The new Income Tax bill allows long-term capital losses (LTCL) incurred up to March 31, 2026, to be set off against any short-term capital gains (STCG) from tax year 2026–27 onwards. This marks a key departure from the current provisions under the Income Tax Act, 1961, which only allow LTCL to be set off against long-term capital gains (LTCG).The proposed change, found in Clause 536(n) of the new bill, enables broader capital gains tax planning and faster loss absorption.“Under clause 536(n) of the new tax bill, 2025 any capital loss, whether long-term or short-term, computed under the old Income Tax Act, 1961 and brought forward as on 31 March 2026, may be set off and carried forward against ‘income under the head Capital gains’ under the new tax bill 2025. Notably, this provision does not draw a distinction between long-term and short-term capital gains for the purpose of set-off,” said Chartered Accountant Dr Suresh Surana, according to an ET report.What’s changing?Currently, under Section 74 of the Income Tax Act, 1961, long-term capital losses can only be set off against LTCG. This restriction limited the flexibility for taxpayers to manage losses.“Currently, the Income Tax Act, 1961 allows the set-off of brought forward LTCL only against LTCG, limiting taxpayers’ flexibility to offset LTCL with STCG,” said Aseem Mowar, Tax Partner at EY India.However, as per the transitional provision in the new Income Tax Bill, this restriction is being eased — but only temporarily — for losses incurred up to March 31, 2026.“The proposed new Income Tax Bill, 2025 continues this restriction for LTCL incurred after April 1, 2026, but the ‘Repeal and Saving’ clause in Section 536 (specifically 536(2)(n)) permits the set-off of LTCL incurred until March 31, 2026, against any capital gains under ITB 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,” Mowar explained.Why it mattersThis one-time relief can significantly reduce tax outgo for individuals who have accumulated LTCL over the years and have struggled to match it with sufficient LTCG.“The transitional provision under Section 536(n)… carries significant implications for taxpayers holding accumulated capital losses, particularly long-term capital losses (LTCL), as on 31 March 2026,” Surana said.“By permitting the set-off of such brought forward losses, whether long-term or short-term, against any form of capital gains… the legislation offers a temporary but meaningful departure from the restrictive loss-set-off rules under the current Income-tax Act, 1961.”It also opens the door for tax planning strategies ahead of FY 2026–27.“Taxpayers can sell investments likely to incur long-term losses before April 1, 2026, allowing them to offset these losses against future short-term capital gains,” Mowar added. “This dispensation, albeit temporary, allows taxpayers to leverage their losses more effectively, reducing overall tax liabilities.”Why is this only a one-time relief?Since the relief falls under the ‘Repeal and Saving’ clause of the new bill, it is designed to offer transitional assistance as the old Income Tax Act, 1961 is replaced.“It is important to note that ‘Repeal and Saving’ clauses are typically included when old legislation is replaced with new one, ensuring that certain rights or obligations under the old law are preserved,” said Mowar.“The majority may argue that this appears to be a well-thought-out dispensation… others may view it as an oversight, as it contradicts established provisions. Thus, it remains to be seen how the provision is ultimately enacted.” he added.