When you incur a loss on the sale of a capital asset, it is classified as a capital loss. However, this does not mean the loss is entirely unrecoverable. You can utilize such losses to set-off gains from other capital assets, reducing your overall tax liability. There are, however, specific rules and conditions for setting off and carrying forward capital losses. In this article, we will explore how capital losses are treated and the guidelines for set-off and carry forward.

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

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. 

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 2024-25, Mr Chetan has the following income and brought forward losses: 

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

Solution:

Note: Long-term capital loss cannot be set off against short-term capital gain. Hence, the unadjusted long-term capital loss of FY 2023-24 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 so that you can carry forward and set off the losses in the subsequent years. 

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Set-off and Carry Forward of Losses