Set-off and Carry Forward of Losses

What a capital loss can offset, in the same year

Loss type	Can offset
Short-term capital loss	Any short-term capital gain, and any long-term capital gain
Long-term capital loss	Only long-term capital gain

Short-term capital loss is the more flexible of the two, it can offset both short-term and long-term capital gains. Long-term capital loss is more restricted, it can only be set off against long-term capital gains, never against short-term gains or any other head of income.

Carrying the loss forward

If a loss cannot be fully absorbed in the year it occurs, the unused portion carries forward for 8 subsequent financial years, but only against income taxable under the head Capital Gains, it cannot offset any other type of income in later years either.

The condition that trips people up

Carrying the loss forward at all requires filing your return of income within the prescribed due date for the year the loss occurred. Miss that filing deadline, and the loss simply cannot be carried forward, regardless of how large it was or how much sense using it in a later year would have made.