I have incurred a Capital loss after selling my Equity Shares/ Equity Mutual Fund Units. Do I need to pay tax on this?

If you've incurred a capital loss from selling your equity shares or equity mutual fund units, the good news is that you don’t need to pay any tax on the loss itself. However, the tax implications depend on whether the loss is short-term or long-term, and how you plan to utilize that loss to reduce your overall tax liability. Here’s a detailed explanation:

1. Capital Loss on Equity Shares and Equity Mutual Fund Units

• Capital loss arises when you sell an asset for a price lower than its purchase price. In your case, it could be from selling equity shares or equity mutual funds at a loss.

• These assets are typically subject to capital gains tax when sold at a profit. If the sale results in a loss, then it is termed a capital loss.

2. Short-Term vs. Long-Term Capital Loss

The way your capital loss is treated depends on whether the asset is classified as a short-term or long-term holding.

Short-Term Capital Loss (STCL):

• Short-term capital gains or losses apply to equity shares or equity mutual fund units held for 12 months or less.

• Tax on STCL: Short-term capital gains from the sale of equity shares/equity mutual funds are taxed at 15% (if the gains exceed ₹1 lakh in a financial year). If you incur a short-term capital loss, you do not pay any tax, but you can offset this loss against any short-term capital gains (STCG) in the same year.

Long-Term Capital Loss (LTCL):

• Long-term capital gains or losses apply when the equity shares or mutual fund units are held for more than 12 months.

• Tax on LTCG: Long-term capital gains on equity shares or equity mutual fund units are taxed at 10% (if the gains exceed ₹1 lakh in a financial year) without the benefit of indexation.

  • Long-term capital loss: If you incur a long-term capital loss (LTCL), you cannot offset it against any short-term capital gains (STCG) or other types of income. However, you can carry forward the LTCL for up to 8 years and set it off against future long-term capital gains.

3. How Can You Utilize a Capital Loss?

Set-off Against Other Gains:

• Short-Term Capital Loss (STCL): You can set off a short-term capital loss against:

  • Short-term capital gains (STCG) from other equity sales in the same financial year.

  • If there are still remaining short-term capital losses after setting them off against STCG, you can carry forward the loss to the next year.

• Long-Term Capital Loss (LTCL):

  • You can only set off a long-term capital loss against long-term capital gains (LTCG) from equity shares or equity mutual funds. If you don’t have any LTCG in the current year, you can carry forward the loss for 8 years to offset against any future LTCG.

Example 1: Short-Term Capital Loss (STCL)

• You sold equity shares for ₹1,00,000 at a loss of ₹20,000.

• In the same year, you made short-term capital gains of ₹50,000.

  • Offsetting the loss: Your short-term capital loss of ₹20,000 can be set off against the ₹50,000 of short-term capital gains, reducing your taxable STCG to ₹30,000.

  • You will then pay tax on ₹30,000 at 15%.

Example 2: Long-Term Capital Loss (LTCL)

• You sold equity mutual fund units for ₹3,00,000, incurring a long-term capital loss of ₹50,000 (after holding the units for more than 12 months).

• You didn’t make any long-term capital gains in the same year.

  • Carrying forward the loss: You can carry forward the ₹50,000 long-term capital loss and use it to offset any future long-term capital gains from equity investments in the coming years, up to 8 years.

4. Reporting the Loss in Your Income Tax Return (ITR)

To claim the set-off and carry forward of the capital loss, you need to report it in your Income Tax Return (ITR).

• If you have incurred a capital loss, it must be reported in the capital gains schedule of your ITR.

• Carry forward: If you are carrying forward the loss, ensure that you file your tax return within the due date to be eligible to carry forward the loss to the next year.

• Losses can only be carried forward if the ITR is filed on time (by the due date). If you miss the due date, you will not be able to carry forward the loss.

5. What if You Don’t Have Any Capital Gains to Set Off Against?

If you incur a capital loss but do not have any capital gains to set it off against in the same year, you can still carry forward the loss.

• Short-Term Capital Loss (STCL) can be carried forward for 8 years to offset future short-term capital gains.

• Long-Term Capital Loss (LTCL) can also be carried forward for 8 years, but only to offset future long-term capital gains.

Key Points to Remember:

1. Capital Loss: You don't pay tax on a capital loss.

2. Offsetting: Capital losses can offset capital gains, either in the same year or carried forward to future years.

3. Carry Forward:

   • Short-term capital losses can be carried forward for 8 years.

   • Long-term capital losses can be carried forward for 8 years, but can only offset long-term capital gains.

4. Set-Off Rules:

   • Short-term capital losses can only offset short-term capital gains, and long-term capital losses can only offset long-term capital gains.

Conclusion

If you’ve incurred a capital loss from selling your equity shares or equity mutual fund units, you don’t have to pay any tax on the loss. Instead, you can use this loss to offset future capital gains. Short-term capital losses can be set off against short-term capital gains, and long-term capital losses can only be set off against long-term capital gains. In case you don’t have any gains to set off against, you can carry forward the losses for up to 8 years. Always ensure that you file your returns on time to take advantage of loss carry-forward provisions. If needed, consult a tax expert to maximize the benefit of the capital loss and ensure correct filing.