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Income Tax Act provisions allow taxpayers to set off and carry forward capital losses, reducing tax liability in future years. Here’s everything you need to know.
Short-Term Capital Loss (STCL) can be set off against both short-term and long-term capital gains in the same financial year.
Investors often face capital losses while trading in stocks, real estate, or other assets. This financial year 2024-25, the stock market has seen consistent sell-off since September 2024, which has adversely affected investors across categories, be it long-term investors or F&O traders. However, it can save you income tax as several Income Tax Act provisions allow taxpayers to set off and carry forward capital losses, reducing tax liability during the same year of up to eight years.
Here’s everything you need to know about the set-off and carry forward of capital gains loss and the rules related to them.
Types of Capital Gains and Losses
Under the Income Tax Act, capital gains are classified into two categories:
1. Short-Term Capital Gains (STCG): Gains from the sale of assets like equity shares or equity mutual fund units held for a short duration, typically within 12 months for listed assets and 24 months for unlisted assets. Previously taxed at 15 per cent, the Budget 2024 had increased the STCG tax rate to 20 per cent.
2. Long-Term Capital Gains (LTCG): Gains from assets held for a longer duration, i.e., more than 12 months for listed assets and 24 months for unlisted. The LTCG tax rate is 12.5 per cent after the Union Budget 2024, increased from 10 per cent earlier.
Correspondingly, capital losses are also classified as short-term capital loss (STCL) and long-term capital loss (LTCL).
Importantly, LTCG up to Rs 1.25 lakh in a financial year is exempt from tax.
Set-Off of Capital Losses
Capital losses can be adjusted (set off) against capital gains. For example, if you have suffered a short-term capital loss of Rs 50,000 on equity shares of a company in a financial year and gained a short-term capital gain of Rs 50,000 on another company’s shares. This sets off the STCG with STCL, thus there is no tax liability on the investors. Here are the following rules:
1. Short-Term Capital Loss (STCL) can be set off against both short-term and long-term capital gains in the same financial year.
2. Long-Term Capital Loss (LTCL) can only be set off against long-term capital gains only.
Importantly, capital losses cannot be adjusted against any other income heads, such as salary, business income, or house property income.
Carry Forward of Capital Losses
If the losses are not fully set off in the same financial year due to insufficient gains, they can be carried forward for future adjustment. For example, you have suffered a short-term capital loss of Rs 50,000 on a company’s equity shares in a financial year and gained a short-term capital gain of Rs 30,000 on another company’s shares. In this case, the balance Rs 20,000, which could not be set off this year, can be carried forward in the subsequent eight years. So, this loss can be used to save taxes on the similary gains in the future eight years.
The rules for carrying forward losses are:
– Capital losses can be carried forward for eight assessment years.
– Losses can be set off only against the same category of income in the subsequent years, i.e., LTCL against LTCG and STCL against STCG/LTCG.
– The taxpayer must file their income tax return (ITR) on or before the due date under Section 139(1) to claim carry-forward benefits. Late filing leads to the forfeiture of this benefit.
– Loss from House property can be set off against income under any head up to a limit of Rs 2 lakhs.
Understanding Carry Forward Of Losses Through An Example
Suppose an investor incurs a short-term capital loss of Rs 1,00,000 in the financial year 2023-24 but has short-term capital gains of only Rs 40,000. The remaining Rs 60,000 can be carried forward to the next financial year and adjusted against future gains for up to eight years.
It is important to note that the ITR must be filed within the original deadline in order to carry forward losses.
Rules On Set-Off Of Losses Of One Category With Another Category
According to the FAQs available on the income tax department’s website, following are the rules for inter-head adjustments:
Loss from speculative business cannot be set off against any other income. However, non-speculative business loss can be set off against income from speculative business.
Loss under head “Capital gains” cannot be set off against income under other heads of income.
No loss can be set off against income from winnings from lotteries, crossword puzzles, race including horse race, card game, and any other game of any sort or from gambling or betting of any form or nature.
Loss from the business of owning and maintaining race horses cannot be set off against any other income.
Loss from business specified under section 35AD cannot be set off against any other income ( section 35AD is applicable in respect of certain specified businesses like setting up a cold chain facility, setting up and operating warehousing facility for storage of agricultural produce, developing and building housing projects, etc.)
Loss from business and profession cannot be set off against income chargeable to tax under the head “Salaries”.
According to a Hindustan Times report, if someone has a loss from one house property, he or she can adjust it against income from another house property. If there’s still a loss after this, you can set it off against income from other sources, but only up to Rs 2 lakh a year. Any loss beyond Rs 2 lakh cannot be adjusted against other income in the same year.
“The remaining loss (unabsorbed loss) can be carried forward for the next eight years, but it can only be adjusted against income from the house property in those years. It cannot be used to reduce income from salary, business, or other sources in subsequent years,” says Rahul Singh, senior manager, tax and corporate advisor Taxmann, a according to the HT report.
