When you calculate your Capital Gains and where the sale receipts from the capital asset is less than cost of acquisition (whether indexed or not) and expenses on transfer – instead of a capital gain you incur a capital loss.
While capital gains are taxed according to the tax rate applicable, based on the type of asset and they are long term or short term. Let’s understand how capital losses are treated.
Set off of Capital Losses
The Income Tax does not allow loss under the head capital gains to be set off against any income from other heads – this can be only set off within the ‘Capital Gains’ head.
- Long Term Capital Loss can be set off only against Long Term Capital Gains.
- Short Term Capital Losses are allowed to be set off against both Long Term Gains and Short Term Gains.
Carry Forward of Losses
Fortunately, if you are not able to set off your entire capital loss in the same year, both short term and long term loss can be carried forward for 8 assessment years immediately following the assessment year in which the loss was first computed.
If capital losses have arisen from a business, such losses are allowed to be carried forward and carrying on of this business is not compulsory. Do you have previous year’s losses you want to carry forward – Here’s a very easy guide that explains how you can add your previous year’s losses to your IT Return on cleartax.in.
Treatment of Long term Loss on Shares and Equity Funds
If you have incurred a long term capital loss on selling shares or equity mutual fund units after 31.3.2018 then you can set them off against any LTCG. As profits/gains on long term shares or equity funds are now taxable in excess of Rs.1 lakh.
Also, you can carry forward these losses for setting off in later years up to 8 assessment years. Prior to 31.03.2018, there was no tax on long term gains on shares & equity funds, therefore long term gains on shares & equity funds were considered as a dead loss. Therefore, the same was not allowed to set off or carried forward.
Shares and Equity Funds are long term capital assets when held for more than 12 months.
Mandatory Filing of a Return
To keep a track of your losses, the income tax department has laid out that losses for a year cannot be carried forward unless that year’s return has been filed before the due date.
Even if it’s a loss return, you do not have any income to show – do file your return before the due date.
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Set-off and Carry Forward of Losses
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Let's delve into the key concepts embedded in the provided article:
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Capital Gains Calculation:
- Capital gains result from the sale of capital assets, and they are calculated by deducting the sale receipts from the cost of acquisition and expenses on transfer.
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Taxation of Capital Gains:
- Capital gains are subject to taxation based on the type of asset and whether they are classified as long-term or short-term. The tax rate applied varies accordingly.
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Set Off of Capital Losses:
- Losses under the head of capital gains cannot be set off against income from other heads; they can only be set off within the 'Capital Gains' head.
- Long-term capital losses can offset only against long-term capital gains.
- Short-term capital losses can be set off against both long-term and short-term gains.
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Carry Forward of Losses:
- Unabsorbed capital losses, both short-term and long-term, can be carried forward for up to 8 assessment years from the year in which the loss was first computed.
- Losses arising from a business can also be carried forward, and the continuity of the business is not mandatory.
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Treatment of Long-term Loss on Shares and Equity Funds:
- Long-term capital losses on shares or equity mutual fund units incurred after March 31, 2018, can be set off against any long-term capital gains, considering that long-term gains on shares or equity funds are taxable in excess of Rs. 1 lakh.
- These losses can be carried forward for up to 8 assessment years.
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Mandatory Filing of a Return:
- The income tax department mandates the filing of returns to carry forward losses. Losses for a particular year cannot be carried forward unless the return for that year has been filed before the due date.
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Related Articles:
- The article emphasizes the importance of filing returns, even in the case of a loss, to keep track of losses for future set-off and carry-forward.
Understanding these concepts is vital for individuals managing their capital gains and losses for effective tax planning and compliance. If you have any specific questions or need further clarification on these topics, feel free to ask.
