Can I set off a loss on shares against gains or carry it forward?

What does the law say?

Section 37A(5) of the Income Tax Ordinance, 2001 opens with “Notwithstanding anything contained in this Ordinance”, so it overrides the general loss rules. It says that where a person sustains a loss on disposal of securities in a tax year, the loss is set off only against the person’s gain from any other securities chargeable to tax under section 37A.

The main rule then says no loss is carried forward. A proviso, added by the Finance Supplementary (Second Amendment) Act, 2019, softens that for losses from tax year 2019 onward: the part not set off in the year is carried forward to the following tax year, set off only against securities gains taxed under section 37A, and cannot be carried forward to more than three tax years immediately after the year the loss was first computed.

“Securities” here means what section 37A(3) lists: shares of a public company, PTC vouchers, modaraba certificates, instruments of redeemable capital, debt securities, units of exchange traded funds and derivative products.

How does it work in practice?

For listed shares, NCCPL does the set-off. Rule 13N of the Income Tax Rules, 2002 (our copy is amended to 24 November 2023) sets out the steps:

• Same year. Rule 13N(6): a loss on listed securities determined by NCCPL in a financial year is set off against gains on securities in that same year.
• Carry forward. Rule 13N(7) repeats the three-year limit for losses from tax year 2019 onward.
• Conditions and order. Rule 13N(7A) says NCCPL sets off carried forward losses only for a taxpayer whose name appears on the Active Taxpayers’ List for the tax year the loss relates to. The adjustment is made monthly, oldest loss first, and NCCPL keeps a year-wise balance so it can track when each loss expires.
• Monthly tax. Rule 13N(10) says NCCPL’s monthly collection is worked out after adjusting losses, including losses carried forward.

Worked example (illustrative figures)

Bilal runs a mobile phone shop in Faisalabad and trades listed shares on the side. He is on the Active Taxpayers’ List every year, and all his shares were bought after 1 July 2024, so Division VII taxes his gains at 15%.

Tax year	Gains on shares	Losses on shares	Loss brought forward used	Taxable gain	Tax at 15%	Loss left to carry forward
2026	Rs. 120,000	Rs. 320,000	nil	nil	nil	Rs. 200,000
2027	Rs. 150,000	nil	Rs. 150,000	nil	nil	Rs. 50,000
2028	Rs. 90,000	nil	Rs. 50,000	Rs. 40,000	Rs. 6,000	nil

Step by step:

1. Tax year 2026: Rs. 120,000 - Rs. 320,000 = a net loss of Rs. 200,000, carried forward.
2. Tax year 2027: gain of Rs. 150,000 is fully absorbed. Rs. 200,000 - Rs. 150,000 = Rs. 50,000 still to carry forward.
3. Tax year 2028: Rs. 90,000 - Rs. 50,000 = Rs. 40,000 taxable. 15% x Rs. 40,000 = Rs. 6,000.

If Bilal had made no gains in 2027 to 2029, the 2026 loss could not be used after tax year 2029, the third tax year after 2026.

What if my losses and gains are taxed at different rates?

Division VII sets different rates depending on when shares were acquired (for example 12.5% for shares bought from 1 July 2013 to 30 June 2022, and a holding-period scale for shares bought from 1 July 2022 to 30 June 2024). Section 37A(5) does not say which rate band a loss is matched against first. Rule 13N applies the first in, first out method, but neither text settles this point in words, so this page does not resolve it.

What if the loss is from an off-market sale?

The second proviso to section 37A(1) sends disposals of listed shares made outside a registered stock exchange and not settled through NCCPL to section 37. A loss on such a sale is a capital loss under the ordinary rules. Section 59 says a capital loss cannot be set off against income under any other head, is carried forward against later capital gains, and can go forward for up to six tax years, with the earliest loss used first. That six-year rule does not apply to section 37A losses, because section 37A(5) overrides it.

What if my loss is from before tax year 2019?

The proviso covers only losses sustained in tax year 2019 and onward. For earlier years, the main rule of section 37A(5) applies: no loss is carried forward.

Common mistakes

• Using a share loss against salary or business income. Section 37A(5) limits set-off to securities gains.
• Applying the six-year capital loss rule. That is section 59; securities losses under section 37A get three years.
• Dropping off the Active Taxpayers’ List. Under rule 13N(7A), NCCPL carries losses forward only for a taxpayer on the list for the year of the loss.
• Assuming a loss on an off-market transfer sits in the NCCPL pool. Those disposals fall under section 37 and section 59.

What to check in the official text

Read section 37A(3), (4) and (5) with its proviso, and section 59. For how NCCPL applies the rules, read rule 13N(6) to (10) of the Income Tax Rules, 2002, including the illustration that rule 13N(7A)(e) points to. Our copy of the Rules is amended only to 24 November 2023, so check for later SROs.