Mutual fund losses can be used to offset capital gains and reduce your overall tax liability in India. **Short-term and long-term capital losses** from mutual funds can be adjusted against capital gains, but they must follow specific rules set by the Income Tax Act.
1. Types of Mutual Fund Losses and Their Tax Treatment
Mutual fund losses are categorized into two types:
- Short-Term Capital Loss (STCL): If you sell a mutual fund **within 1 year (equity funds) or 3 years (debt funds)** at a loss, it is considered an STCL.
- Long-Term Capital Loss (LTCL): If you sell a mutual fund after **1 year (equity funds) or 3 years (debt funds)** at a loss, it is an LTCL.
2. Can Mutual Fund Losses Be Set Off?
Yes! Mutual fund losses can be **adjusted (set off) against capital gains** to reduce tax liability:
- STCL: Can be set off against **both short-term and long-term capital gains** in the same financial year.
- LTCL: Can only be set off against **long-term capital gains (LTCG)**, not STCG.
If there are **no capital gains** in the same year, you can carry forward the losses.
3. Carrying Forward Mutual Fund Losses
If you can’t set off losses in the same year, you can **carry forward** them for **up to 8 years**.
- STCL: Can be carried forward and set off against future **capital gains**.
- LTCL: Can be carried forward but can only be adjusted against **future LTCG**.
Important: You must **file your income tax return (ITR) before the due date** to carry forward losses.
4. Key Takeaways
- Mutual fund **losses can reduce taxable capital gains**.
- **STCL** can be set off against **both STCG and LTCG**.
- **LTCL** can be set off **only against LTC**
