1. Investments in Stock Market may sometime turn negative value and the investor has to book losses and move on. In such circumstances, Income Tax Act provides relief to the investor from tax point of view. There is an option to set off such losses against gain in the same financial year. If a person cannot set-off a capital loss under the same head during the same financial year, he can carry forward such losses to the next financial year and can be set-off against Capital Gains (if any) arising in the next year. The details of setting off and carrying forward of Capital gain / Losses required to be reported in Income Tax Return.
2. The Article covers step by step procedure to report Set Off and Carry Forward of Losses in ITR 2 along with relevant provisions and Rules under Income Tax Act.
3 DOWNLOAD DEMAT ACCOUNT STATEMENT: The first step for a taxpayer is to download / obtain Demat Statement.
3.1 Demat Account statement is a summary of all the shares in demat account. The statement provides the relevant details like sale consideration, date of acquisition, Cost of acquisition, Period of holding, ISIN Code etc. These inputs are needed for preparing Capital Schedules of Income Tax Return.
3.2 Demat Statement can be download either directly from the website of the relevant national depository or through broker with whom the taxpayer maintains a demat account.
REPORTING TO PORTAL
(a) Login to www.incometax.gov.in
(b) The path is: – e-file>Income Tax Return > File Income Tax Return. Select: AY 2021-22(Current AY) > online. Start New filing > Individual> Select ITR Form > ITR 2> Let’s Get Started. Tick on the reason for filing Tax. Taxable income is more than basic exemption limit.
(c) Select Schedules – General
(d) Click on Continue. The following screen will be displayed\
(e) Click on the relevant schedules (i.e. Schedule Capital Gain, Sec 112 A)
(ei) Enter the details from Demat Statement & confirm.
ILLUSTRATION: – DETAILS FROM DEMAT STATEMENT
|Sl||Particulars||Amount ( Rs.)|
|(a)||Loss on sale of shares listed in BSE. Shares were held for 15 months and STT paid on Sales and Acquisition||(3,00,000)|
|(b)||Long Term capital Gain on sale of Bonds||(75000)|
|(c )||Long Term Capital Loss on Listed Equity Shares (STT Paid)||( 1,00,000)|
|(e)||Short Term Capital gain on Equity ( Sec 111A)||1,90,000|
(f) The summary of the transactions entered in the schedules will be displayed in the following manner: –
(g) Now click on Schedule CYLA (Current Year Losses Adjustments). The details entered in Capital Gain Schedules will reflect in Set Off/ Carry Forward Schedules.
Note: Set off & carry Forward Schedules will fetch data from Capital gain Schedule. The taxpayer need not to enter the details again in these schedules.
Note: Long term capital Loss cannot be adjusted against Short Term Losses. Thus Short Term Capital Gain after set off remains unadjusted.
(g) Click on Schedule CFL (Carry Forward Losses)
(h) The unadjusted losses of 2021-22 will be carried forward for next 8 financial years. If a taxpayer cannot set-off a capital loss under the same head during the same financial year, he can carry forward such losses to the next financial year and can be set-off against Capital Gains (if any) arising in the next year.
(i) Similarly, Schedule BFLA will reflect Brought Forward Losses Adjustments and Schedule SI will show summary of Capital gain/ Losses at special rates.
(j) The Tax computation will do at the end i.e. after the set off of losses if any.
6. CAPITAL LOSSES PROVISIONS AND RULES UNDER INCOME TAX ACT
(a) The losses in Stock market can be a Short Term Capital Loss (STCL) or a Long Term Capital Loss (LTCL) depending upon the ‘Period of Holding’.
(b) Shares, Equity Mutual Fund, Listed Debentures & Bonds, held for less than 12 months are short term Capital Assets and tax rate is 15%. Capital Gain / Losses from sale of such Assets covered under sec 111A of the Act
(c) Debt Mutual Funds, Gold ETFs unlisted debentures etc. considered as short term if, a period of holding is less than 36 months. The STCG tax rate on such Non-Equity funds (or) Debt funds is as per the investor’s income tax slab rate.
(d) Equity Shares & Equity Oriented funds, which are subject to Security Transaction Tax, held for more than 12 months are Long Term Capital Assets. The tax rate is 10%, on LTCG exceeding Rs 1 Lakh. – Sec 112A is applicable for Capital gain/ Loss on such Assets.
(e) The Capital Assets other than Equity shares and Equity Oriented Funds are Long Term Capital assets, if period of holding is more than 36 months. The tax rate on such assets is 20% with indexation.
(a) Capital Losses can’t be set off against any other head of income: – Capital losses such as loss on stock investment cannot be set off against any other head like Income from Salary, Income from Business or Profession. Rental Income from house property and other sources of income.
(b) Short Term Capital Losses can be set off against Long term capital Gain but Long term capital Loss cannot be adjusted against Short Term Losses
(c) A capital loss can be carried forward for 8 years from the end of the financial year in which the loss has been incurred. If a person cannot set-off a capital loss under the same head during the same financial year, he can carry forward such losses to the next financial year and can be set-off against Capital Gains (if any) arising in the next year.
(d) A capital loss can be carried forward to the next year only if the person had declared such losses in ITR and the tax return is filed before the due date.
8. SALIENT POINTS TO REMEMBER
(a) Long term Capital Gain (LTCG) on debts Funds (Tax rate 20%) can be adjusted against LTCG on Equity Shares/MF (Tax rate 10%) and vice versa.
(b) Capital Loss on Equity Stock, Equity Oriented Mutual funds sale prior to 31st Jan 2018 is not subject to set off as there was no capital gain tax prior to 31st Jan 2018
(c) LTCL on sale of shares cannot be set-off against STCG on sale of shares
(d) STCG on sale of shares cannot be set-off against LTCL on sale of shares, where other conditions are met, i.e. deal on NSE/BSE, and STT paid on both legs of purchase/sale
(e) Accumulation of losses by not setting off in the year where there is eligible income is not possible. A taxpayer cannot carry forward losses in spite of having capital gain in financial years.
For Example, Mr. Anupam has brought forwarded losses of Rs 20000 from FY 2019-20 and his Long Term capital gain in 2020-21 is 25000/-. He cannot opt to carry forward losses in next year without setting off with the gain in the year 2020-21
(f) There is no standard rule that the short-term capital loss has to be first set off against short-term capital gains before being set off against long-term capital gains. One need to look at the applicable tax rate on various Capital Gains and try to set-off capital loss against the capital gain which has the lowest tax rate, considering his tax slab.
Disclaimer: The article is for education purpose only.
The author can be approached at [email protected]