India’s 2025 Income-Tax Act: Carry Forward of Capital Losses for NRIs and Investors

India’s transition to the Income-tax Act, 2025, effective April 1, 2026, brings important considerations for Non-Resident Indians (NRIs) and other investors regarding capital losses. A key aspect of this new legislation is its provision for carrying forward existing stock and mutual fund capital losses. The Income-tax Act, 2025, aims to maintain continuity by preserving capital losses computed under the previous Income-tax Act, 1961. This means that losses incurred and properly reported before the new law takes effect will not simply disappear.

The new act ensures that the eight-year limit for carrying forward capital losses remains unchanged. This continuity is vital for investors who have strategically managed their portfolios and tax liabilities. The transition does not reset the expiration clock for these losses, nor does it create new tax benefits or extend original limitation periods. Understanding these rules is essential for NRIs, returning residents, students abroad, and professionals working overseas who hold Indian investments.

Preserving Capital Losses Under the New Tax Regime

Section 536 of the Income-tax Act, 2025, specifically addresses the continuity of rights, liabilities, and losses from the repealed 1961 Act. This provision is crucial for investors who have recorded capital losses on assets like listed shares, equity and debt mutual funds, Exchange Traded Funds (ETFs), Portfolio Management Services (PMS) holdings, Employee Stock Ownership Plans (ESOPs), inherited securities, and assets held through NRE, NRO, or resident accounts. These losses, if validly computed and reported under the old law, can be carried forward into the new regime.

The core principle is that the transition to the Income-tax Act, 2025, does not nullify these existing positions. A taxpayer who booked a valid short-term or long-term capital loss under the Income-tax Act, 1961, can continue to utilize it under the new law. The loss retains its original tax identity, meaning a short-term capital loss remains short-term, and a long-term capital loss remains long-term, even after April 1, 2026.

Understanding Set-Off Rules for Carried-Forward Losses

The set-off rules, which dictate how capital losses can be used against future capital gains, continue to apply under the Income-tax Act, 2025. These rules maintain the original tax identity of the losses. Specifically, a short-term capital loss can be set off against both short-term capital gains and long-term capital gains. In contrast, a long-term capital loss can only be set off against long-term capital gains.

This distinction is important for investors when planning future sales of Indian assets. For example, an investor with a short-term capital loss from selling listed shares has more flexibility in offsetting it against various types of future gains compared to an investor holding a long-term capital loss from mutual fund units, which is restricted to long-term capital gains. The Income-tax Act, 2025, preserves these established principles, shaping tax outcomes for investors after the new law’s commencement.

The Eight-Year Carry-Forward Limit Remains Intact

A critical aspect of the continuity provided by the Income-tax Act, 2025, is the preservation of the existing time limit for carrying forward capital losses. Under the Income-tax Act, 1961, capital losses could be carried forward for eight assessment years immediately following the assessment year in which the loss was first computed. The Income-tax Act, 2025, does not alter this timeline.

This means that if a loss was first computed for Assessment Year (AY) 2023-24, it will continue to count from AY 2023-24 under the new law. The transition to the Income-tax Act, 2025, does not grant a fresh eight-year period starting from April 1, 2026. Investors must adhere to the original eight-year window for each specific loss. This continuity ensures that the transition is a legislative update, not a reset of tax benefits.

Conditions for Valid Carry-Forward Claims

The Income-tax Act, 2025, preserves only validly determined losses. It does not offer a remedy for non-compliance with the rules of the Income-tax Act, 1961. Under the previous law, taxpayers generally had to file a return of loss within the prescribed due date to be eligible to carry forward certain losses. If a return was filed late and the loss did not qualify for carry-forward under the old Act, the Income-tax Act, 2025, will not revive such claims.

This rule is particularly relevant for smaller investors and many NRIs who might have assumed a return was unnecessary if tax was deducted at source or if their Indian income was low. In cases involving capital losses, this assumption can lead to the forfeiture of a future tax shield. For instance, an NRI who sold Indian shares at a short-term capital loss in FY 2024-25 and reported it in a timely filed return under the Income-tax Act, 1961, can carry it forward under the new regime. However, if the return was filed belatedly, the Income-tax Act, 2025, will not validate that claim.

Practical Steps for Investors Navigating the Transition

Investors planning future sales of Indian securities, mutual funds, or property need to carefully review their carry-forward schedules before computing taxes under the Income-tax Act, 2025. This review should begin with the tax returns themselves. Taxpayers must confirm that the loss was accurately reported in their income-tax return, that the return was filed within the due date where required, and that the loss was accepted or processed in the tax records.

It is also important to verify the character of the loss, distinguishing between short-term and long-term capital losses, as they have different set-off rules. Investors must also check the remaining duration of the eight-year carry-forward period, rather than assuming the new law has extended it. Finally, the nature of the planned future transaction is crucial, as a carried-forward capital loss can only offset eligible capital gains, not other forms of income.

NRIs must also ensure their residential status and the capital gains schedule in their Indian returns accurately reflect their position for each year. The new law upholds what was validly established under the old regime; it does not rectify classification errors made during previous filings. This emphasis on timing and accuracy means that a missing or defective return, even if filed due to a belief that it was unnecessary, could prevent the utilization of a genuine market loss against a future profitable sale.