By ipomarket.in Editorial Team · Last reviewed: 2026-07-18
Disclaimer: This article is for informational purposes only and does not constitute investment advice. IPO investments are subject to market risks. Please read the offer document carefully and consult a SEBI-registered investment advisor before investing.
Not every IPO ends in a listing-day pop. Sometimes the shares you were allotted, or bought at listing, are trading below your cost when you sell. The good news is that Indian income tax law does not treat that loss as money simply thrown away. Under the rules for set-off and carry forward, a capital loss can reduce the tax you pay on other capital gains, either in the same year or over several future years, provided you follow the compliance rules exactly.
This is an explainer on how those rules apply to losses on IPO-allotted shares. One point up front: the tax law does not have a separate category for "IPO shares". Once shares are allotted and credited to your demat account, they are treated like any other listed equity share for capital gains purposes. So the rules below apply equally to shares you bought in the secondary market.
What is set-off?
Set-off means adjusting a loss against income or profit of the same year so that your taxable income comes down. If you booked a capital gain on one stock and a loss on another in the same financial year, set-off lets you net the loss against the gain, and you pay tax only on the difference.
There are two layers to this:
- Intra-head set-off (Section 70): adjusting a loss against income under the same head of income, even if the two come from different sources. A loss on one equity share can be set off against a gain on another.
- Inter-head set-off (Section 71): adjusting a loss under one head against income under a different head. This is where capital losses face a hard limit, explained below.
What is carry forward?
If a loss cannot be fully set off against income in the same year, the unadjusted part can be carried forward to future years and set off against eligible income in those years. Carry forward exists because it is unfair to tax you only in the good years while ignoring the bad ones.
For capital losses, the carry forward period is eight assessment years immediately following the year in which the loss was first computed, as set out in Section 74 of the Income Tax Act. After eight years, any leftover loss lapses.
How IPO stock losses are classified
When you sell IPO-allotted listed shares at a loss, the loss is a capital loss, and it is either short-term or long-term depending on your holding period:
- Short-term capital loss (STCL): if you held the listed shares for 12 months or less before selling at a loss.
- Long-term capital loss (LTCL): if you held them for more than 12 months.
The holding period is generally counted from the date of allotment or acquisition. This classification matters a great deal, because STCL and LTCL do not enjoy the same freedom to be set off.
Set-off rules for capital losses
The most important restriction is that capital losses can only be set off within the capital gains head. Under Section 74, a capital loss cannot be set off against salary, business income, house property income or any other head. It stays inside "Capital Gains".
Within that boundary:
- Short-term capital loss can be set off against both short-term capital gains and long-term capital gains.
- Long-term capital loss can be set off only against long-term capital gains, not against short-term gains.
In practice, STCL is the more flexible of the two. If you have an LTCL from an IPO share you held for over a year, you can use it only against long-term gains elsewhere in your portfolio, not against short-term profits.
A note on the new law. From 1 April 2026, the Income-tax Act, 2025 replaced the Income-tax Act, 1961. According to the research reviewed, the substantive set-off and carry forward rules are unchanged, and a savings provision preserves the treatment of losses brought forward from before that date under the old Section 74. Early drafts of the Bill reportedly proposed a transitional relief allowing brought-forward LTCL to offset short-term gains, but that provision was dropped in the final enacted Act. So the LTCG-only restriction on LTCL continues. Treat the exact section references under the new Act as unverified until confirmed against the official statute.
Carry forward period and the one condition you cannot skip
Both STCL and LTCL can be carried forward for up to eight assessment years. But there is a single, non-negotiable condition:
You must file your income tax return on or before the due date under Section 139(1) for the year in which the loss occurred.
If you file a belated return under Section 139(4), you lose the right to carry forward capital losses. This is the pitfall that catches most retail investors. Filing on time is not optional if you want to preserve a loss for future set-off, and it applies even if you have no income to declare and are filing only to record the loss.
The due date for individuals is usually 31 July of the assessment year. For FY 2024-25, the research indicates this was extended to 15 September. Deadlines shift from year to year and by taxpayer category, so always check the notified due date for the relevant year rather than assuming 31 July.
If you want a refresher on the mechanics of applying and record-keeping around IPOs, see our guides on how to apply for an IPO online in 2026 and maintaining IPO trade records for tax filing.
How this differs from F&O and intraday losses
Many IPO investors also trade derivatives or do intraday trades. The loss rules there are different, and mixing them up is a common error:
- Intraday equity trading is treated as speculative business. Speculative losses can be set off only against speculative profits, and can be carried forward for four assessment years, not eight.
- F&O (futures and options) is treated as non-speculative business income. F&O losses can be set off against other business income (except speculative) in the same year, and carried forward for eight assessment years.
So you cannot use an intraday loss to reduce your IPO capital gains, and you cannot use an IPO capital loss to reduce F&O business profits. The heads and categories are kept separate by law.
Buyback proceeds: a recent change
Separately, the research notes a Budget 2026 change under which buyback proceeds are now taxed under capital gains, meaning your cost of acquisition and the resulting gain or loss are computed like a normal sale of shares. If you tendered IPO-allotted shares in a buyback, this affects how the outcome is reported. Confirm the exact effective date and mechanics with a tax professional, as this is a reported change we have not independently verified.
Common pitfalls to avoid
- Filing late and losing the loss. A belated return kills carry forward of capital losses. File by the due date.
- Trying to offset LTCL against short-term gains. Not allowed. LTCL goes only against LTCG.
- Mixing capital losses with business or salary income. Capital losses stay within the capital gains head.
- Not reporting the loss at all. A loss you never declared in a timely return cannot be carried forward later.
- Confusing intraday and F&O rules with capital gains rules. Different categories, different carry forward periods.
Compliance checklist
- Identify whether each IPO loss is STCL or LTCL based on holding period.
- Set off STCL against any capital gains; set off LTCL only against LTCG.
- Report all losses in your ITR for the year they occurred.
- File the return on or before the Section 139(1) due date to preserve carry forward.
- Keep contract notes, demat statements and allotment records for at least eight assessment years.
- Track carried-forward losses year to year so you actually use them before the eight-year limit.
FAQ
Are losses from IPO shares taxed differently from other shares?
No. Once shares are allotted and listed, a loss on selling them is treated as a normal capital loss on listed equity. There is no separate IPO category in the tax law.
Can I set off an IPO loss against my salary?
No. Capital losses can only be set off within the capital gains head, not against salary, business or other income.
How long can I carry forward a capital loss from IPO shares?
Up to eight assessment years after the year the loss was computed, provided you filed your return on time. After that, any unused loss lapses.
What happens if I file my ITR late?
A belated return under Section 139(4) means you lose the right to carry forward capital losses. You can still declare the loss, but you cannot carry it forward to future years.
Can I use a long-term IPO loss against short-term gains?
No. A long-term capital loss can be set off only against long-term capital gains. A short-term capital loss is more flexible and can be set off against both short-term and long-term gains.
Before acting on any of this, confirm the current year's ITR due date and section references, and consult a qualified tax professional or a SEBI-registered advisor for your specific situation.
Last reviewed: 2026-07-18 by the ipomarket.in Editorial Team.