Capital Loss: Treatment for Income Tax purposes

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At the time of sale of any Asset, if a Short Term/ Long Term Capital Loss arises to a taxpayer; this loss is allowed to be set-off in the same year against other incomes. However, if this loss is not set-off in the same year, it is allowed to be carried forward to the next year.

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Set-off of Capital Loss

Capital Loss arising to a taxpayer can only be set off against incomes from the same head i.e. it can only be set off against incomes arising under the head “Capital Gains” and cannot be set off against incomes arising under the following heads, namely

  1. Salary
  2. House Property
  3. Business/ Profession
  4. Other Sources

Moreover, Capital Loss cannot be set off against all Capital Gains and there are several rules for set-off of such loss which are mentioned below.

Long Term Capital Loss

If any Long Term Capital Loss arises on the sale of any asset, it is allowed to be set-off against long term capital gains arising from the sale of any asset.

However, long term capital loss arising from the sale of shares, mutual funds etc on which STT has been paid is not allowed to be set-off against any other capital gain. Therefore, long term loss arising from the sale of shares, mutual funds etc on which STT has been paid is also called as Dead Loss.

Short Term Capital Loss

Short term capital loss arising from the sale of any asset (incl. Shares & Mutual Funds) is allowed to be set-off against any income whether Short Term or Long Term.

The above conditions have been summarised in the following table

Particulars Set-off of Loss
Inter head Same head
Short Term Loss
   Shares, Mutual Funds etc x LTCG/STCG
   Others x LTCG/STCG
Long Term Loss
   Shares, Mutual Funds etc x x
   Others x LTCG

‘x’ indicates that set-off is not allowed

Carry Forward of Capital Loss

If a capital loss cannot be set off from the same head during the same year, it shall be carried forward to the next year and allowed to be set off against Capital Gains arising in the next year. After carrying forward the losses to the next year, set-off would be done in the same manner as mentioned above.

A Capital Loss is allowed to be carried forward for 8 years from the end of the year in which the loss was incurred.

Compulsory filing of Return of Loss before the due date

Loss can be carried forward to the next year only when the loss is properly disclosed in the Income Tax Return and the income tax return is filed before the due date of filing of return.

If the income tax return is not filed before the due date and a belated return is filed after the due date, capital loss would not be allowed to be carried forward to the next year.

However, if the income tax return was filed before the due date and later a revised return is filed, the loss as disclosed in the return would be allowed to be carried forward. [CIT v Periyar District Co-Operative Milk Producers Union Ltd.]

A Personal Finance enthusiast, Karan is the founder of charteredclub.com and loves to discuss about Money related matters.