SET OFF OF AND CARRY FORWARD OF LOSSES (Only In case of Equity Shares / Equity Mutual Funds)

INTRODUCTION

Profit or loss on sale of Equity Shares / Equity Mutual Funds is shown under the head ‘Income from Capital Gain’. According to the provisions of Income Tax Act, loss under the head capital gain i.e. capital loss, can be adjusted against the other capital gains. Additionally, the balance amount of loss after adjustment can be carried forward to next year. Let us understand the provisions in detail.

UNDERSTANDING THE TERMS RELATED TO CAPITAL LOSS

1. Short Term Capital Asset –If equity share or equity mutual fund unit is sold within 12 months from the date of purchase, then it is considered as a Short Term Capital Asset for the purpose of calculation of capital gain. Any profit / loss from sale of short term capital asset is a short term capital gain / Loss.

2. Long Term Capital Asset –If Equity share or Equity Mutual Fund Unit is held for more than 12 months from the date of purchase, then it is considered as a Long Term Capital Asset for the purpose of calculation of Capital gain. Profit / Loss from sale of long term capital asset is a long term capital gain / Loss

3. Losses –It simply means negative incomes under any head. i.e. when cost of purchase is more than sale price then, the resultant amount is a loss.

4. Capital Losses –In case of sale of any capital asset, where the purchase price of the capital asset is more than the sale price of the capital asset, then the resultant amount is a capital loss. The said capital loss is to be shown under the head ‘Income from Capital Gain’

5. Set off of Losses –Set off of losses simply means adjusting the losses with the profits. Generally, losses can be adjusted against the incomes from the same head or incomes shown under other heads of income. As far as Capital Losses are concerned, those can be adjusted only against capital gains.E

6. Carry forward of Losses – If a capital loss is not adjusted against the capital gains, then it can be carried forward to next assessment year. The carried forward loss can be adjusted with the capital gains of the subsequent years.

Examples: For detail examples on each term, click here.

SET OFF OF CAPITAL LOSSES

In case of set off of capital losses, there are four basic thumb rules

  1. Short Term Capital Losses can be adjusted against Short Term Capital Gains
  2. Short Term Capital Losses can be adjusted against Long Term Capital Gains
  3. Long Capital Losses can be adjusted against Long Term Capital Gains
  4. However, Long Term Capital Losses cannot be adjusted against Short Term Capital Gains
Type of Loss To be adjusted Against Allowed?
Short Term Capital Loss Long Term Capital Gain Yes
Short Term Capital Loss Short Term Capital Gain Yes
Long Term Capital Loss Long Term Capital Gain Yes
Long Term Capital Loss Short Term Capital Gain No

There is no restriction regarding the nature of asset held.

Example –Long Term Capital Loss on sale of Mutual Fund Units can be adjusted against the Long-Term Capital Gain on sale of Equity Shares.

CARRY FORWARD OF CAPITAL LOSSES

If any capital gain remains unadjusted in a particular financial year, then it can be carried forward up to 8 assessment years.

Example 1 –Consider the data of Mr. Ashok for FY 2018-19

Particulars Amount Rs.
STCG on sale of Equity Shares Rs. 50,000
STCL on redemption of Equity Mutual Funds Rs. 20,000
LTCG on redemption of Equity Mutual Funds Rs. 10,000
LTCL on sale of Equity Shares Rs. 30,000

Now, the loss shall be adjusted as below

Particulars Capital Gain Capital Loss Taxable Capital Gain Loss Carried forward to next year
Short Term Capital Gain Rs. 50,000 (Rs. 20,000) Rs. 30,000 Nil
Long Term Capital Gain Rs. 10,000 (Rs. 10,000) Nil (Rs. 20,000)

Now, the unadjusted Long-Term capital loss of Rs. 20,000 can be carried forward up to 8th Assessment year. Therefore, loss of FY 2018-19 i.e. AY 2019-20 shall be carried forward up to AY 2027-28.

Example 2

In continuation with the above example, if Mr. Ashok earns a capital gain of Rs. 50,000 in AY 2020-21, then the carried forward loss of Rs. 20,000 shall be adjusted against the gain and net capital gain of Rs. 30,000 shall be taxable in the hands of Mr. Ashok.

FILING OF INCOME TAX RETURN

Unadjusted loss can be carried forward to the next year only if, the Income Tax Return for that particular year is filed on or before due date applicable to the taxpayer. If the Income Tax Return is not filed on or before due date, the loss shall be lapsed.

Many more Examples with infographics and more details at https://TaxYadnya.in

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