See this discussion from March. I had said that the ITR would compute things similar to what you describe in your post (that is, it would offset long term losses first against the 1L exemption, so that this exemption gets eaten up first,), and both @Quicko and @San78 said this is not how it would be. @San78 also posted a screenshot of the ITR form showing a computation which does things differently than what I said.
Perhaps you are entering things incorrectly in the ITR in some way? Does the screenshot from that other post make sense?