When you calculate your Capital Gains and where the sale receipts from a Capital Asset is less than cost of acquisition (whether indexed or not) and expenses on transfer – instead of a Capital Gain you incur a Capital Loss. While Capital Gains are taxed according to the tax rate applicable based on the type of asset and whether they are long term or short term, let’s understand how Capital Losses are treated.
Set off of Capital Losses: The Income Tax does not allow Loss under the head Capital Gains to be set off against any income from other heads – this can be only set off within the ‘Capital Gains’ head. Long Term Capital Loss can be set off only against Long Term Capital Gains. Short Term Capital Losses are allowed to be set off against both Long Term Gains and Short Term Gains.
Carry Forward of Losses: Fortunately, if you are not able to set off your entire capital loss in the same year, both Short Term and Long Term loss can be carried forward for 8 Assessment Years immediately following the Assessment Year in which the loss was first computed. If Capital Losses have arisen from a business, such losses are allowed to be carried forward and carrying on of this business is not compulsory.
Treatment of Long term Loss on Shares and Equity Funds:
If you have incurred a long term capital loss on selling shares or equity mutual fund units after 31.3.2018 then you can set them off against any LTCG , as profits/gains on long term shares or equity funds are now taxable in excess of Rs. 1 lakh; this amendment was announced in Budget 2018. Also, you can also carry forward these losses for setting off in later years up to 8 assessment years.
Prior to 31.03.2018, there was no tax on Long Term Gains on Shares & Equity Funds, therefore Long Term Capital Loss on Shares and Equity Funds was considered as a dead loss. Therefore, the same was not set off or carried forward.
Shares and Equity Funds are long term capital assets when held for more than 12 months.
Mandatory Filing of a Return: To keep a track of your losses, the Income Tax Department has laid out that Losses for a year cannot be carried forward unless that year’s return has been filed before the due date. Even if it’s a loss return, you do not have any income to show – do file your return before the due date.