Capital Loss on Foreign Stocks: New Set-Off Rules in DTC 2025

Key Takeaways

• Expanded Loss Set-Off: The Direct Tax Code (DTC) 2025 permits setting off long-term capital losses (LTCL) from foreign equities against both Indian and foreign long-term capital gains (LTCG). This is a significant departure from the 1961 Act, which restricted LTCL set-off to only LTCG.
• Uniformity in Asset Treatment: Under the new code, the distinction between foreign listed and unlisted securities for tax purposes is minimized. The primary classification is now based on the holding period, simplifying compliance for employees holding various global equities like RSUs and ESOPs.
• Stringent Reporting in Schedule FA: While offering flexibility in loss set-off, the DTC 2025 mandates more granular reporting of foreign assets in Schedule FA. Taxpayers must now provide detailed information on the nature of losses and gains, linking them directly to specific assets.
• Impact on Global Tech Employees: Professionals with Restricted Stock Units (RSUs) or Employee Stock Ownership Plans (ESOPs) from foreign parent companies are the most affected. The new rules provide a mechanism to offset potential losses from foreign stock sales against a wider array of gains, offering a potential reduction in overall tax liability.

PART 1: EXECUTIVE SUMMARY

This compliance guide outlines the critical changes in the set-off rules for capital losses on foreign equities, transitioning from the Income Tax Act, 1961, to the new Direct Tax Code (DTC), 2025. These amendments directly impact Indian resident taxpayers, especially tech sector employees with global stock compensation.

• The Old Law (1961): The Income Tax Act, 1961, imposed restrictive conditions on setting off capital losses. A short-term capital loss (STCL) could be set off against both short-term (STCG) and long-term capital gains (LTCG). However, a long-term capital loss (LTCL) could only be set off against long-term capital gains. This limitation often resulted in unrelieved losses for taxpayers whose portfolios consisted of diverse assets with mismatched gain/loss profiles. For foreign equities, which were treated as unlisted assets, this meant an LTCL could not be offset against STCG from any source, including Indian listed equities.

• The New Law (2025): The Direct Tax Code, 2025, introduces a more liberalized framework for capital loss set-offs. A pivotal change is that long-term capital losses from the sale of foreign equities can now be set off against both foreign and Indian long-term capital gains. The core principle of not allowing capital losses to be set off against other income heads (like Salary or House Property) remains, but the fungibility within the 'Capital Gains' head has been enhanced.

• Who is Impacted: The primary group affected by this change comprises resident Indian employees of multinational technology companies who receive RSUs, ESOPs, or other forms of equity compensation from a foreign parent company. These individuals often hold a portfolio of foreign stocks and can now more effectively manage their tax liabilities by offsetting losses from these foreign assets against a broader category of capital gains. Investors using the Liberalised Remittance Scheme (LRS) to invest in foreign markets will also be significantly impacted.

PART 2: DETAILED TAX ANALYSIS

1. The Challenge for Global Tech Employees

For years, tech professionals in India receiving stock units from their global headquarters have faced a complex tax landscape. The process involves two taxable events:

1. At Vesting/Exercise: The Fair Market Value (FMV) of the shares on the vesting date is treated as a perquisite, taxed under the head 'Salaries' at applicable slab rates.
2. At Sale: The difference between the sale price and the FMV at vesting constitutes a capital gain or loss.

Under the 1961 Act, a significant challenge arose when these foreign shares, once sold, resulted in a long-term capital loss. Foreign equities are treated as unlisted securities for Indian tax purposes, regardless of their listing status on exchanges like the NASDAQ or NYSE. This classification mandates a holding period of more than 24 months to qualify as a long-term capital asset.

The restriction that LTCL could only be set off against LTCG created tax inefficiencies. An employee might have a substantial LTCL from their company stock but also have STCG from other Indian investments. The inability to offset the foreign LTCL against the Indian STCG often led to a higher tax outgo, even with overall portfolio losses.

2. Statutory Changes: 1961 Act vs 2025 Act

The transition to the Direct Tax Code, 2025, introduces targeted amendments to the provisions governing the set-off and carry-forward of losses.

3. Schedule FA & Foreign Asset Reporting

The disclosure of foreign assets by Resident and Ordinarily Resident (ROR) individuals is mandatory under Schedule FA of the Income Tax Return. This requirement continues under the DTC 2025, with heightened scrutiny. Non-disclosure can attract severe penalties under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

Under the DTC 2025, Schedule FA has been amended to capture more specific details relevant to the new loss set-off rules.

Key Additions to Schedule FA for FY 2025-26 (AY 2026-27) Filing:

• Table A3 (Financial Interest): Now includes sub-sections to specify whether a gain or loss on sale was short-term or long-term.
• New Annexure for Loss Allocation: A separate annexure requires taxpayers to detail how capital losses from foreign assets have been set off against various capital gains during the financial year.
• Traceability Requirement: Taxpayers must provide the acquisition date, vesting date (for RSUs/ESOPs), sale date, and calculations for each transaction resulting in a loss that is claimed for set-off.

This increased reporting is designed to ensure transparency and prevent misuse of the liberalized loss set-off provisions. The Income Tax Department now cross-verifies this information with data received from foreign jurisdictions under automatic information exchange agreements.

4. Scenario Analysis

Let's analyze the practical impact of this change with a hypothetical case for a tech employee, Ms. Sharma, for the Financial Year 2025-26.

Ms. Sharma's Financial Data:

• Salary Income: INR 40,00,000
• Long-Term Capital Loss from Foreign RSUs: (Held for 30 months) - INR 5,00,000
• Short-Term Capital Gain from Indian Stocks: INR 3,00,000
• Long-Term Capital Gain from Indian Mutual Funds: INR 1,50,000

Tax Treatment under the Old Act (1961):

1. Set-off LTCL: The foreign LTCL of INR 5,00,000 can only be set off against LTCG.
   • Set off against LTCG from Mutual Funds: INR 1,50,000.
   • Remaining LTCL: INR 3,50,000.
2. STCG Treatment: The STCG of INR 3,00,000 cannot be set off against the remaining LTCL. It will be taxed at the applicable rate (e.g., 15%).
3. Carry Forward: The unabsorbed LTCL of INR 3,50,000 would be carried forward to be set off only against future LTCG for the next 8 years.
4. Result: Ms. Sharma pays tax on the STCG of INR 3,00,000 while having a substantial unutilized loss.

Tax Treatment under the New Direct Tax Code (2025):

1. Set-off LTCL: The foreign LTCL of INR 5,00,000 can now be set off against both LTCG and STCG.
   • Set off against LTCG from Mutual Funds: INR 1,50,000.
   • Set off against STCG from Indian Stocks: INR 3,00,000.
2. Total Loss Utilized: INR 4,50,000 (1,50,000 + 3,00,000).
3. Net Capital Gains: Zero.
4. Carry Forward: The remaining unabsorbed LTCL of INR 50,000 (5,00,000 - 4,50,000) is carried forward.
5. Result: Ms. Sharma's capital gains tax liability for the year is nil, providing significant relief.

5. Compliance Checklist 2026

For taxpayers preparing to file their returns in 2026 for the financial year 2025-26, adherence to the new compliance requirements is paramount.

• Collate All Foreign Asset Documents: Gather statements from foreign brokers for all RSU/ESOP transactions, including grant letters, vesting schedules, and sale confirmations.
• Accurate FMV Calculation: Ensure the Fair Market Value (FMV) at the time of vesting is correctly calculated and documented, as this forms the cost basis for capital gains computation.
• Segregate Gains and Losses: Clearly distinguish between short-term and long-term capital gains and losses for both Indian and foreign assets.
• Fill Schedule FA Meticulously: Disclose every foreign asset held during the financial year in Schedule FA, irrespective of whether it generated income. This includes details of acquisition, sale, and balances.
• Maintain Proof of Set-Off: Keep detailed worksheets calculating how losses have been set off against gains, as this will be required for the new annexure.
• File the Correct ITR Form: Taxpayers with foreign assets must file ITR-2 or ITR-3. ITR-1 and ITR-4 are not applicable as they do not contain Schedule FA.
• Foreign Tax Credit (Form 67): If any tax has been paid in a foreign country on the capital gains, file Form 67 before the ITR filing deadline to claim foreign tax credit under the relevant Double Taxation Avoidance Agreement (DTAA).

This shift in the tax code represents a significant rationalization of capital gains taxation, offering tangible benefits to globally compensated employees and investors. However, the advantage of flexible loss set-offs is coupled with a responsibility for more detailed and transparent reporting.

💡 Tech Employee Tip: Restructuring your salary or vesting RSUs? Understand the new capital gains rules for 2025.