India’s 2026 Tax Law: Carry Forward of Capital Losses for NRIs and Investors

India’s new Income-tax Act, 2025, set to take effect on April 1, 2026, will maintain the ability for Non-Resident Indians (NRIs) and other investors to carry forward eligible stock and mutual fund capital losses. This transition ensures that losses calculated under the previous Income-tax Act, 1961, will remain valid, preserving the original eight-year limit for carry-forward. The new legislation aims to provide continuity for taxpayers, preventing old capital losses from expiring simply due to a change in tax statutes.

The Income-tax Act, 2025, replaces the 1961 Act, but Section 536 of the new law specifically preserves rights, liabilities, and losses incurred under the repealed legislation. This means that any capital losses that were validly established and carried forward under the old regime will continue to be recognized. However, the new Act does not offer new tax benefits, extend existing time limits, or revive claims that were not valid under the previous law.

This continuity is particularly important for NRIs, returning residents, students abroad, and professionals working overseas who hold Indian investments. Many of these individuals possess shares, mutual funds, or other assets in India, and market fluctuations can lead to capital losses. These losses, if properly reported in earlier tax returns, can be used to offset future capital gains. The transition to the Income-tax Act, 2025, ensures that these positions are not nullified.

Preserving the Character of Capital Losses

A key aspect of the new tax law is that it maintains the original tax identity of capital losses. A short-term capital loss incurred under the Income-tax Act, 1961, will remain a short-term capital loss even after April 1, 2026. Similarly, a long-term capital loss will retain its long-term character. This distinction is critical because the rules for setting off these losses against future gains differ.

Under the existing and continuing rules, 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 difference will continue to influence tax planning for investors selling Indian assets after the new law comes into effect. For instance, an investor with a short-term loss from listed shares has more flexibility in offsetting it compared to someone with a long-term loss from mutual fund units.

The Eight-Year Carry-Forward Limit Remains

The Income-tax Act, 2025, does not alter the time limit for carrying forward capital losses. Under the Income-tax Act, 1961, capital losses could be carried forward for eight assessment years following the year in which the loss was first computed. This eight-year period will continue uninterrupted under the new law. For example, a loss first computed for Assessment Year (AY) 2023-24 will still expire after AY 2030-31. The transition to the new law does not restart this clock or grant an additional eight-year period from April 1, 2026.

This means that investors cannot claim a fresh start for old losses simply because the tax legislation has changed. The continuity provided by the new Act is about preserving existing valid positions, not about creating new opportunities for past non-compliance.

Conditions for Valid Carry-Forward

The transition provisions protect losses that were validly determined under the Income-tax Act, 1961. They do not, however, rectify any non-compliance issues that existed under the old law. Generally, under the 1961 Act, taxpayers were required 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 was therefore not eligible for carry-forward under the old Act, the Income-tax Act, 2025, will not revive that claim.

This point is especially relevant for smaller investors and many NRIs who might have assumed that filing 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 valuable future tax shield. An NRI who sold Indian shares at a short-term capital loss in FY 2024-25 and reported this loss in a timely filed return under the 1961 Act can continue to carry it forward. The remaining period of the original eight-year limit and the existing set-off rules will still apply.

Practical Considerations for Investors

The implications of these transition rules extend to practical tax filing and planning. Investors who anticipate selling Indian securities, mutual funds, or property in the future need to be aware of their carry-forward loss schedule before computing their taxes under the 2025 Act. This review should begin with the original tax returns. Taxpayers should verify that the loss was indeed reported, that the return was filed within the due date where required, and that the loss was accepted or processed in the tax records.

The character of the loss—whether short-term or long-term—must also be checked, as the rules for setting them off against future capital gains remain distinct. Furthermore, the age of the loss is important; investors need to calculate how many years are left in the eight-year carry-forward period. Finally, the nature of the planned future transaction is crucial, as a carry-forward capital loss can only offset eligible capital gains, not any other type of income.

For NRIs, maintaining accurate records of their residential status and capital gains schedules in their Indian tax returns is essential. The new law preserves what was validly established, but it does not correct classification errors made during previous filings. This emphasizes the importance of accuracy and timely filing, as a missing or defective return from the past could prevent the use of a genuine market loss against a future profitable sale.

The Income-tax Act, 2025, therefore, offers continuity for legitimate tax positions but does not provide a waiver for past errors. It carries existing lawful losses into the new statute without altering the conditions under which they were originally created. While eligible carry-forward losses will not be canceled simply because the 1961 Act is ending, and their short-term or long-term nature will remain unchanged, the new law does not serve as a second chance for past mistakes. Losses that were invalid under the old regime will remain unusable, and losses already partway through their eight-year life will continue to expire on their original schedule. Taxpayers preparing their returns during this transition period must treat their past records as the definitive starting point.

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