If you have incurred a capital loss, the tax authorities allow you to use this loss to reduce taxable capital gains from another source under certain conditions. Here is a simplistic example for explanation. If you have incurred a loss of Rs 1,000 from sale of shares of Company ABC and you have made a profit of Rs 2,000 from sale of shares of Company XYZ, you can use the loss on sale of shares of Company ABC to reduce the taxable capital gains earned on sale of shares of Company XYZ. In other words, you will pay capital gains tax on only Rs 1,000 (gain of Rs 2,000 earned on sale of shares of Company XYZ – loss of Rs 1,000 incurred on sale of shares of Company ABC).

Long-term capital losses
Since long-term capital gains earned on your equity investment are tax-free, long-term capital losses incurred on your equity investment cannot be used to reduce taxable capital gains.

Short-term capital losses
Short-term capital losses incurred on your equity investment can be set off against any capital gain (long-term or short-term). If in the current year you don’t have any taxable capital gain to set off the loss against, you can carry forward this loss for 8 years and set it off against any future taxable capital gain (long-term or short-term).