How to Set off & Carry Forward Capital Losses

Updated on: Mar 30th, 2024

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7 min read

When you calculate your Capital Gains and where the sale receipts from the 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 they are long-term or short-term. Let’s understand how capital losses are treated.

Set off of Capital Losses

The Income-tax Act,1961 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. Do you have previous year’s losses you want to carry forward – Here’s a very easy guide that explains how you can add your previous year’s losses to your IT Return on cleartax.in.

Let’s try to understand this with the example below

During the FY 2023-24, Mr Chetan has the following income and brought forward losses: 

Particulars

Amount

Short-term capital gains on sale of shares

1,75,000

Brought forward Long-term capital loss of AY 2022-23

(96,000)

Short-term capital loss of AY 2023-24

(42,000)

Long term capital gain u/s 112

85,000

What is the capital gain taxable in the hands of Mr. Chetan for the AY 2024-25?

Solution:

Particulars

Amount

Amount

Short-term capital gains on the sale of shares

Less: Brought forward short-term capital loss of the AY 2023-24

 

Long-term capital gain

Less: Brought forward long-term capital loss of AY 2022-23 of Rs96,000 set-off to the extent of Rs 85,000

Taxable short-term capital gains

1,75,000

(42,000)

 

85,000

 

(85,000)

 

1,33,000

 

 

 

Nil

 

1,33,000

Note: Long-term capital loss cannot be set off against short-term capital gain. Hence, the unadjusted long-term capital loss of AY 2022-23 of Rs 11,000 (i.e., Rs 96,000 – Rs 85,000) has to be carried forward to the next year to be set off against long-term capital gains of that year.

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.

Also, you can 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 gains on shares & equity funds were considered as a dead loss. Therefore, the same was not allowed to 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.
 

Related Articles

Set-off and Carry Forward of Losses

Frequently Asked Questions

I have not filed my return before the due date. Can I file the belated return and carry forward the loss?

No, you cannot carry forward losses in such conditions. 

Can current year short-term capital losses be carried forward without being deducted from the incomes of the current year?

No, The losses must be offset against the income of the current year, and any remaining losses can be carried forward to subsequent years. 

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Quick Summary

Capital gains can lead to capital losses if sale receipts are less than acquisition cost. Set off losses within 'Capital Gains' head only. Carry forward short-term and long-term losses for 8 years. Apply rules for mixing types of gains/losses. Mandatory tax return filing for carrying forward losses.

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