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Capital Loss Carryover

Reviewed by Annapoorna | Updated on Sep 30, 2020

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Introduction

Under the income tax laws, any specific transfer of the capital asset leads to either profit or loss. Taxes will accordingly be charged on such profits, after considering for any exemption. However, if the transfer leads to loss, then such loss can be either set off or carried forward to the next financial year.

What is Capital Loss Carryover?

Capital loss carryover refers to the net capital losses that are eligible for a carry forward into the future financial years, under the income tax laws. The net capital loss is arrived at only if the capital losses exceed the capital gains. The capital gains are reduced from the capital losses, within that financial year before carrying forward the loss. There is no upper limit given for the capital loss that can be carried forward under the Indian income tax laws. Further, the capital loss carryover can be classified as short term capital loss or long term capital loss for a particular assessment year but not both.

The income tax law specifies the set-off provisions for utilising such capital losses.Section 74 specifies the law for treating the losses under the head 'capital gains'. As per the provision, the condition to allow a set-off has been specified. A loss that relates to a short-term capital asset can be set off against the income under the head 'Capital gains' if any, within that assessment year. Such loss can be set off with respect to any other capital asset too. On the other hand, where the loss pertains to a long-term capital asset, the condition is different. Such long term capital loss can be set off against any income under the head ""Capital Gains"" if any, chargeable for that assessment year itself. But, a condition is provided that such capital asset should not be a short term capital asset.

In order to classify a capital asset as long term or short term, the period of holding such capital asset is to be reckoned. The general definition of short term capital asset is placed in the law with exceptions to it too. It states that those capital assets held by the tax assessee up to thirty-six months immediately preceding the date of its transfer are short term capital assets. The rest are long term capital assets. However, in cases of securities listed on the recognised stock exchange or units of equity-oriented mutual funds, the short term period is twelve months. Whereas, in cases of securities not listed on a stock exchange or immovable properties, the period to reckon short term is twenty-four months.

Another important condition is set forth for capital loss carryover. The period of such carry forward cannot exceed eight assessment years from the year in which such loss was computed.

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