Can You Adjust Capital Losses against Capital Gains for Tax Calculations?

Income tax rules around set off and carry forward of capital losses

Adjust Capital Losses against Capital Gains

A capital loss is the sale of an asset for a consideration that is less than its cost of purchase. The cost of purchase may, of course, be indexed on a cost basis and can include expenses on transfer. You must pay income tax on a profitable sale of an asset. But what does the income tax say about the loss on the sale of an asset?

If you incurred a capital loss of Rs 5 lakhs and another capital gain of Rs 10 lakhs in the same year, what should be your taxable income? Will the answer change if you had a capital loss of Rs 5 lakhs and a salary of Rs 10 lakhs during the year? This is where the concept of set off becomes important. 

Also Read: How to save more taxes when you have exhausted all other tax saving investment options

Set Off of Capital Loss 

According to section 70 of the Income Tax Act, a capital loss can be set off against income from capital gains only. Thus, your capital loss cannot be set off against income from salary, business and profession, house property or other sources. Further long-term capital losses can be set off against long-term capital gains only. However, a short-term capital loss can be set off against both short-term and long-term capital gains. 

If you are wondering if the asset you sold was short-term or long-term, the answer is easy. If the asset is an equity-oriented mutual fund and held for less than one year, it is a short-term holding. Equity mutual funds sold after holding more than one year will result in long-term capital gain or loss. For any other asset, the yardstick is three years instead of one year.

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So, let us assume that you have two capital losses and two capital gains,

Short-term capital loss of Rs 2 lakh, a long-term capital loss of Rs 3 lakhs and,

Short-term capital gains of Rs 1 lakhs, long-term capital gain of Rs 2 lakhs.

You can set off the short-term capital loss of Rs 2 lakh against the short-term capital gain or the long-term capital gain. However, you can set off the long-term capital loss of Rs 3 lakhs only against the long-term capital gain of Rs 2 lakhs only. Thus, Rs 1 lakh of your long-term capital loss will remain even after the set-off.

You can carry forward this long-term capital loss of Rs 1 lakh for tax purposes.

Also Read: Clubbing of income: Are you transferring money to your spouse to save tax? Beware you still need to pay tax on income

Carry Forward of Capital Loss

Set off is not possible if you don’t have any capital gain during the year. However, you can also carry forward your short-term and long-term capital losses for eight assessment years after reporting them in your tax return. If you have a capital gain in any of these eight years, you can set off your carried forward capital loss.

We hope this answers your basic doubts and concerns about the treatment of capital gains and losses under the Income Tax Act.

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.



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