Capital Loss

Reviewed by Sujaini | Updated on Aug 27, 2020

What is Capital Loss?

A capital loss is the loss incurred when the value decreases for a capital asset, such as an investment or real estate. This loss will not be realised until the asset is sold for a price lower than the purchase price originally.

A capital loss is essentially the difference between the purchase price and the selling price of the asset, where the selling price is lower than the purchase price. For instance, if an investor bought a house for Rs 25 lakh and sold the house five years later for Rs 20 lakh, the investor realises a capital loss of Rs 5 lakh.

Capital Loss Set-Off

The income tax does not allow losses to be offset against any income from other heads under capital gains - this can only be offset within the heading 'Capital Gains'. Long-term capital losses can only be set against long-term capital gains. Short-term capital losses may be offset against both long-term earnings and short-term earnings.

Carry Forward of Losses

Thankfully, if you are unable to recover the entire capital loss in the same year, you can carry forward both the short-term and long-term loss for eight assessment years immediately after the assessment year in which the loss was first measured. When capital losses occur from a company, these losses may be carried forward, and it is not necessary to carry this onto the business.

Mandatory Filing of a Return

The Department of Income Tax has clarified that losses for a year cannot be carried forward unless the return for that year has been filed before the due date. Even if it's a return on investment, you don't have to report any profits. Just file your return before the due date.