STCG vs LTCG loss offset matrix for Indian investors: which losses offset which gains

Capital loss set-off rules in India are straightforward once you see the full picture — but most investors (and some CAs) apply them inconsistently, especially when RSU income involves multiple types of gains in the same year.

This guide builds the complete matrix: which losses offset which gains, in what order, with worked examples using RSU perquisite income, STCG from quick RSU sales, and LTCG from matured lots.

The statutory framework

Three sections govern capital loss set-off:

Section 70: Intra-head set-off within the same year. A loss from one capital asset can be set off against a gain from another capital asset of the same type.

Section 71: Inter-head set-off. Capital losses cannot be set off against income under other heads (salary, business, other sources). RSU perquisite income is salary — a capital loss on RSU shares cannot reduce the perquisite taxable at vest.

Section 74: Carry-forward. Unabsorbed capital losses carry forward for up to 8 assessment years.

The complete set-off matrix

Loss type	Can offset	Cannot offset
STCG loss (< 24 months)	✓ STCG gains	✗ Salary / perquisite income
	✓ LTCG gains (after STCG gains exhausted)	✗ Business income
		✗ Income from other sources
LTCG loss (≥ 24 months)	✓ LTCG gains only	✗ STCG gains
		✗ Salary / perquisite income
		✗ Any other income head

The asymmetry: STCG losses are more flexible than LTCG losses. An STCG loss can offset both STCG and LTCG gains. An LTCG loss can only offset LTCG gains.

What no capital loss can offset: RSU perquisite income (taxed as salary under Section 17(2)), dividend income (Section 56 / other sources), interest income. Capital losses are confined to the capital gains head.

Priority order for set-off within capital gains

When you have multiple types of gains and losses in the same year, the set-off happens in this order:

1. STCG loss first sets off against STCG gains in the same year
2. Any remaining STCG loss then sets off against LTCG gains in the same year
3. Any remaining STCG loss carries forward (8 years)
4. LTCG loss sets off against LTCG gains in the same year only
5. Any remaining LTCG loss carries forward (8 years; usable only against future LTCG gains)

The set-off is mandatory — you cannot choose to skip the set-off and carry forward when gains exist. If you have ₹5 lakh STCG gain and ₹3 lakh STCG loss, the loss automatically sets off: net STCG = ₹2 lakh taxable. You cannot carry forward the ₹3 lakh loss as if the gain didn't exist.

Worked examples with RSU income

Example 1: STCG loss offsets LTCG gain

Setup: Staff Engineer at Cisco, FY 2025-26

Income item	Amount	Type
Salary + RSU perquisite at vest	₹80 lakh	Salary (not capital gains)
Sale of Cisco lot (vested Feb 2024, sold Jan 2026)	₹12 lakh gain	LTCG (≥ 24 months)
Sale of Cisco lot (vested Nov 2025, sold Feb 2026)	₹4 lakh loss	STCG (< 24 months; underwater lot)

Set-off:

• Step 1: STCG loss (₹4L) vs STCG gains: no STCG gains this year → ₹0 offset in step 1
• Step 2: Remaining STCG loss (₹4L) vs LTCG gains (₹12L): ₹4L offsets ₹4L of LTCG

Net taxable:

• Salary: ₹80 lakh (no change; capital losses don't touch salary)
• Net LTCG: ₹12L − ₹4L = ₹8 lakh at 12.5% = ₹1 lakh tax (saved ₹50,000 vs ₹12L at 12.5% = ₹1.5L)
• Net STCG: ₹0

Example 2: LTCG loss — limited offset

Setup: NVIDIA engineer, FY 2025-26

Income item	Amount	Type
Sale of NVIDIA (vested Jan 2023, sold March 2026)	₹5 lakh loss	LTCG (≥ 24 months; held as stock fell)
Sale of NVIDIA (vested May 2024, sold Feb 2026)	₹8 lakh gain	STCG (< 24 months; stock rose since vest)

Set-off:

• LTCG loss (₹5L) cannot offset STCG gain (₹8L) ← The key rule many miss
• LTCG loss carries forward for up to 8 assessment years; can only offset future LTCG gains

Net taxable:

• STCG gain: ₹8 lakh at slab rate (30% = ₹2.4 lakh tax)
• LTCG: ₹0 this year (the LTCG loss has nothing to offset)
• LTCG loss of ₹5 lakh carried forward

Lesson: This engineer should consider whether to hold the LTCG-loss lot until they have LTCG gains to absorb it — selling it now produces a loss that can only offset future LTCG, not the current STCG gain. Alternatively, they could sell an older STCG-gain lot as LTCG (if it has crossed 24 months) and use the LTCG loss to offset that.

Example 3: Both types of gains — optimal sequencing

Setup: Broadcom engineer with several lots

Action	Amount	Type
Sold underwater lot (< 24 months)	₹6 lakh loss	STCG loss
Sold profitable lot (< 24 months)	₹4 lakh gain	STCG gain
Sold old matured lot (≥ 24 months)	₹15 lakh gain	LTCG gain

Set-off:

1. STCG loss (₹6L) vs STCG gain (₹4L): offsets fully → net STCG = −₹2L (remaining STCG loss)
2. Remaining STCG loss (₹2L) vs LTCG gain (₹15L): offsets → net LTCG = ₹13L

Net taxable:

• STCG: ₹0
• LTCG: ₹13 lakh at 12.5% = ₹1.625 lakh tax
• Without the STCG harvest: LTCG = ₹15L × 12.5% = ₹1.875 lakh → saving of ₹25,000

Example 4: What a capital loss CANNOT do — the perquisite wall

A common misconception: "My RSU shares are underwater — can I harvest the loss to offset the perquisite income at vest?"

No. The perquisite at vest is salary income (Section 17(2)), not capital gains. Capital losses cannot offset salary income. They can only offset capital gains.

Income	Can capital loss offset?
RSU perquisite at vest	❌ No — this is salary
Capital gain on RSU sale	✅ Yes — this is capital gains
US dividend income	❌ No — this is other sources (Section 56)
Interest from FD	❌ No — this is other sources

This is the most important rule for RSU holders to internalise. A ₹10 lakh capital loss from selling RSU shares at a loss does not reduce the ₹40 lakh RSU perquisite taxable at vest. It only reduces capital gains from other sales.

How Section 111A interacts (Indian equity only)

Section 111A applies to Indian-listed equity held ≤ 12 months, taxed at 20% STCG. This does not apply to foreign stocks (US RSUs, US ETFs) — those have no special rate and are taxed at slab.

For Indian investors with both Indian equity (mutual funds, NSE/BSE stocks) and foreign equity (US RSUs), the set-off rules still apply across both, but the tax rates differ:

• Indian STCG (Section 111A): 20% flat
• Foreign equity STCG: slab rate
• Both are "STCG" for set-off purposes — losses from one can offset gains from the other

A foreign RSU STCG loss can offset an Indian equity Section 111A gain, and vice versa. The tax rate on the net gain is determined by which type of gain remains after set-off.

Planning implications: sell order matters

The order in which you sell lots affects which set-offs are available:

Scenario: You plan to sell some NVIDIA lots this year. You have:

• Lot A: LTCG gain of ₹20 lakh (vested > 24 months ago)
• Lot B: STCG gain of ₹8 lakh (vested < 24 months; stock rose)
• Lot C: STCG loss of ₹5 lakh (vested < 24 months; stock fell)

If you sell all three:

• STCG loss (₹5L) offsets STCG gain (₹8L) = net STCG gain ₹3L
• Remaining STCG loss: ₹0 (fully absorbed by Lot B gain)
• Net LTCG: ₹20L (untouched)

If you sell only Lot A and Lot C (skip Lot B):

• STCG loss (₹5L) offsets LTCG gain: net LTCG = ₹15L
• Lot B STCG gain not realised this year → carry the gain in the stock; sell next year

Which is better? Selling Lot C against Lot A saves: ₹5L × 12.5% = ₹62,500. Selling Lot C against Lot B saves: ₹5L × 30% = ₹1.5L. If you can avoid realising Lot B's STCG this year (hold for LTCG eligibility or sell in a lower-income year), the STCG loss is better deployed in a future year against a 30% STCG gain.

This is advanced planning — worth discussing with a CA who understands RSU lot management.

ITR-2 mechanics

Schedule CG: Enter each sale transaction. The system computes net STCG and net LTCG separately.

Schedule CYLA: Current Year Loss Adjustment — shows how losses are set off against gains within the year.

Schedule CFL: Carry Forward of Losses — shows what remains after set-off, categorised by year and type.

Schedule BFLA: Brought Forward Loss Adjustment — in future years, shows how prior year carry-forwards are set off against current year gains.

Most ITR-2 filing software handles this automatically once all transactions are entered correctly. Verify the Schedule BFLA output matches your carry-forward tracking spreadsheet.

Related reading

• Wash sale rule and Indian RSU holders — why immediate repurchase is valid
• Tax-loss harvesting calendar — execution workflow
• Capital loss carry-forward strategy — building the 8-year loss bank
• How US stocks are taxed in India — full framework including Section 70-74