Capital loss reported in the income tax return (ITR) can be adjusted against capital gains in thefuture as per the income tax rules. The “Income from capital gain” section under the Income TaxAct deals with gains and losses from capital assets.
According to the Income Tax rules, “Any profit or gain arising from transfer of a capital assetduring the year is charged to tax under the head Capital Gains.”
Milin Bakhai, associate partner of N.A. Shah Associates, says, “Any profits or gains arising fromtransfer of capital asset viz. land, building, jewellery, shares, etc., held as investment/capitalassets are considered as capital gain and chargeable to tax under the head ‘Capital Gains’ in theyear of transfer. Assets held as stock in trade are not considered capital assets, and gains arisingfrom that are taxable as business income.”
When there is capital gain income, individuals must report and pay taxes. They should alsoreport in the ITR filing if there is a capital loss or no other income to show. Reporting a capitalloss in their annual ITR makes them eligible to carry it forward and adjust it against capital gainsin the future, as per the income tax rules.
How To Carry Capital LossForward And It Set OffFor Securities And Other Assets?
As per the Income tax provisions, ‘If loss under the head “Capital gains” incurred duringa year cannot be adjusted in the same year, then the unadjusted capital loss can be carriedforward to next year.’
In the coming years, such losses can be adjusted only with income chargeable to taxunder the head ‘Capital gains’ and not with income under any other income tax heads.
Capital gain is categorized as long-term capital gain and short-term capital gain for taxationpurposes under the Income Tax Act, 1961, and different holding periods are prescribed fordifferent assets to classify them as short-term or long-term.
Long-Term Capital Gain (LTCG):
A capital asset held for over 36 months is treated as a long-term capital asset. But, for listedsecurities such as equity shares, and equity-oriented mutual funds, the holding period is 12months. For unlisted securities and immovable property, the holding period is 24 months insteadof 36 months to be considered a long-term capital asset.
For listed debentures, government securities, etc., the holding period is 36 months to beconsidered long-term.
Short-Term Capital Gain (STCG):
If the capital asset is held for not more than 36 months, it will be treated as a short-term capitalasset, and any gain/loss from it will be considered a short-term capital gain/loss. For securities,including shares, equity-oriented mutual funds, listed securities, etc., the short term is consideredif the asset is held for 12 months.
In the case of unlisted securities or immovable property, the holding period is 24 months to beconsidered short-term instead of 36 months.
Bakhai adds, “Short-term capital gain from the sale of listed equity shares and equity-orientedmutual funds is taxable at 15 per cent whereas long-term capital gain in excess of Rs 1 lakh istaxable at 10 per cent. On other assets, the short-term gain is taxable at applicable rates, andlong-term capital gains are taxable at 20 per cent, respectively.”
Points To Note When Set Off Capital Loss:
Notably, the LTCG can be set off only against LTCG, whereas the STCG can be adjustedagainst STCG as well as LTCG.
These losses can be carried forward for eight succeeding years from the year the loss hasincurred.
The capital loss or gain should be furnished in ITR. It should be filed on or before the duedate prescribed under section 139 (1) of Income Tax, otherwise, it cannot be carriedforward. So, a timely return filing is important if one has income/loss under capital gainsto carry it forward and set it off.
