Set-Off and Carry-Forward of Capital Losses: A Guide for Taxpayers

When it comes to taxation in India, one of the common ways to reduce tax liabilities is by utilizing capital losses. These losses arise when you sell an asset—such as shares, mutual funds, or property—at a price lower than the purchase price. Understanding how to set off and carry forward these losses can help minimize your taxable income and reduce your overall tax burden.

This blog explains the process of set-off and carry-forward of capital losses, the types of capital losses, and how you can benefit from these provisions under the Indian Income Tax Act.

What is Capital Loss?

A capital loss occurs when the sale price of a capital asset is less than its original purchase price. This can happen when you sell assets like:

• Equity Shares

• Mutual Funds

• Bonds

• Real Estate

• Gold and Other Assets

Capital losses are categorized into two types based on the holding period of the asset:

1. Short-Term Capital Loss (STCL): Losses incurred from selling assets that were held for less than 36 months (24 months for immovable property) or less than 12 months in case of equity shares or equity mutual funds.

2. Long-Term Capital Loss (LTCL): Losses incurred from selling assets that were held for more than the specified holding period (36 months for immovable property, 12 months for equity shares, and equity mutual funds).

Set-Off of Capital Losses

The Income Tax Act allows you to set off capital losses against any capital gains you have made in the same financial year. The key point here is that you can only set off losses against gains of the same nature.

• Set-off of Short-Term Capital Losses (STCL): STCL can be set off against both short-term capital gains (STCG) and long-term capital gains (LTCG). For example, if you have a short-term capital loss from equity shares and a long-term capital gain from the sale of property, you can set off the loss against the gain.

• Set-off of Long-Term Capital Losses (LTCL): LTCL can only be set off against long-term capital gains (LTCG). It cannot be set off against short-term capital gains.

Example of Set-Off: Suppose you have:

• A short-term capital loss (STCL) of ₹1,00,000 from the sale of equity shares.

• A long-term capital gain (LTCG) of ₹1,50,000 from the sale of a property.

You can set off your STCL of ₹1,00,000 against the LTCG of ₹1,50,000, reducing your taxable LTCG to ₹50,000. Your net taxable capital gain will be ₹50,000, and you will be taxed accordingly.

Carry-Forward of Capital Losses

If you are unable to set off the capital losses against any capital gains in the current year, the Income Tax Act allows you to carry forward the losses to future years. This means that you can carry forward the unutilized losses to the next assessment year and set them off against future capital gains.

• Short-Term Capital Losses (STCL): STCL can be carried forward for 8 consecutive assessment years. The losses will be set off against any capital gains (both STCG and LTCG) in those years.

• Long-Term Capital Losses (LTCL): LTCL can also be carried forward for 8 consecutive assessment years but can only be set off against long-term capital gains (LTCG) in the subsequent years.

Example of Carry-Forward: If you have a long-term capital loss (LTCL) of ₹2,00,000 in the current year and no long-term capital gains (LTCG) to set off, you can carry forward this loss to the next 8 years and use it to offset future LTCG.

Steps to Claim Set-Off and Carry-Forward of Capital Losses

1. File your Income Tax Return (ITR): To avail of the benefits of set-off and carry-forward, it is essential to file your Income Tax Return (ITR) within the prescribed time limit (usually 31st July of the assessment year). If you fail to file your return on time, you won’t be allowed to carry forward the losses.

2. Report the Losses in ITR: While filing your ITR, ensure that you report your capital losses in the relevant section. The capital loss details, including the amount, nature (short-term or long-term), and asset type, must be correctly mentioned in your tax return.

3. Carry Forward the Losses: In case you cannot set off your capital losses in the current year, ensure that you carry forward the losses by filing your return on time. Once carried forward, the losses will automatically be available to offset against future gains in the subsequent years.

4. Claiming Set-Off in Future Years: In the following assessment years, when you have capital gains to report, you can adjust the carried-forward losses against those gains. You will need to report the carried-forward losses in the respective sections of the ITR and claim the set-off.

Key Points to Remember

• Timely Filing: The most important factor in claiming the benefit of carry-forward of capital losses is to file your return on time. If you miss the deadline, you will lose the opportunity to carry forward the loss.

• Losses Can Be Set Off Against Gains of the Same Year: Always ensure you set off your capital losses against your capital gains in the same year before carrying them forward.

• 8-Year Limit: Capital losses can only be carried forward for 8 years, so it’s essential to use them within this time frame.

• Specific Treatment for LTCG: Long-term capital losses (LTCL) can only be set off against long-term capital gains (LTCG) and cannot be adjusted against short-term gains.

• Reassessment: If your capital loss claims are disputed or reassessed by the tax department, you may need to provide proof of your losses and filings.

Example Scenarios

1. Scenario 1 – Set-Off of STCL and LTCL

   • STCL: ₹50,000

   • LTCG: ₹1,00,000

     
     

     You can set off ₹50,000 of STCL against ₹1,00,000 LTCG, leaving you with a taxable LTCG of ₹50,000.

2. Scenario 2 – Carrying Forward STCL

   • STCL: ₹1,00,000

   • No capital gains in the current year.

     
     

     You can carry forward the STCL of ₹1,00,000 to the next year. In the next year, if you have any capital gains, you can set off the carried-forward loss against those gains.

3. Scenario 3 – Carrying Forward LTCL

   • LTCL: ₹2,00,000

   • No LTCG in the current year.

     
     

     You can carry forward the LTCL to the next 8 years, but it can only be set off against LTCG in future years.

Conclusion

Understanding how to set off and carry forward capital losses can be a powerful tool for reducing your taxable income and minimizing your tax liabilities in India. By strategically utilizing your short-term and long-term capital losses, you can offset gains from the sale of other assets, thereby lowering your overall tax burden.

Always remember to file your income tax returns on time to avail of these benefits, and consult a tax professional if you’re unsure about how to handle your capital losses effectively.

Pro Tip: Keep accurate records of all your capital transactions, including purchase and sale details, as these will be necessary for calculating your gains and losses when filing your return.

By planning ahead and using the tax provisions wisely, you can optimize your tax filings and make the most of your investments.