Capital loss reported in the income tax return (ITR) can be adjusted against capital gains in the future as per the income tax rules. The “Income from capital gain” section under the Income Tax Act deals with gains and losses from capital assets.
According to the Income Tax rules, “Any profit or gain arising from transfer of a capital asset during 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 from transfer of capital asset viz. land, building, jewellery, shares, etc., held as investment/capital assets are considered as capital gain and chargeable to tax under the head ‘Capital Gains’ in the year of transfer. Assets held as stock in trade are not considered capital assets, and gains arising from that are taxable as business income.”
When there is capital gain income, individuals must report and pay taxes. They should also report in the ITR filing if there is a capital loss or no other income to show. Reporting a capital loss in their annual ITR makes them eligible to carry it forward and adjust it against capital gains in the future, as per the income tax rules.
How To Carry Capital Loss Forward And It Set Off For Securities And Other Assets?
As per the Income tax provisions, ‘If loss under the head “Capital gains” incurred during a year cannot be adjusted in the same year, then the unadjusted capital loss can be carried forward to next year.’
In the coming years, such losses can be adjusted only with income chargeable to tax under 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 taxation purposes under the Income Tax Act, 1961, and different holding periods are prescribed for different 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 listed securities such as equity shares, and equity-oriented mutual funds, the holding period is 12 months. For unlisted securities and immovable property, the holding period is 24 months instead of 36 months to be considered a long-term capital asset.
For listed debentures, government securities, etc., the holding period is 36 months to be considered 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 capital asset, 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 considered if the asset is held for 12 months.
In the case of unlisted securities or immovable property, the holding period is 24 months to be considered short-term instead of 36 months.
Bakhai adds, “Short-term capital gain from the sale of listed equity shares and equity-oriented mutual funds is taxable at 15 per cent whereas long-term capital gain in excess of Rs 1 lakh is taxable at 10 per cent. On other assets, the short-term gain is taxable at applicable rates, and long-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 adjusted against STCG as well as LTCG.
These losses can be carried forward for eight succeeding years from the year the loss has incurred.
The capital loss or gain should be furnished in ITR. It should be filed on or before the due date prescribed under section 139 (1) of Income Tax, otherwise, it cannot be carried forward. So, a timely return filing is important if one has income/loss under capital gains to carry it forward and set it off.