Set off and carry forward of Capital Gain under Income Tax

CA Vinay Lunkad S

Every loss is a Asset in some or other way !!

Amidst the current economic turmoil going on globally on account of the disruption in the supply chain and economic stillness for a period, there are certain inconspicuous benefits in terms of capital gains tax under the income tax provisions which if planned well may benefit to an extent depending on the income profile and the tax brackets of the person.

A summary of provisions dealing with set off and carry forward of Capital Gains under the Income Tax Act are discussed below :

Capital Gains are of two types :-

1) Short Term Capital Gains :- Gains arising from

a) Sale of listed securities – Sold within 12 months

b) Sale of unit of UTI or unit of a Equity Oriented Fund or a Zero Coupon Bond – Sold within 12 months

c) Sale of unlisted share – Sold within 24 months

d) Sale of an immovable property – Sold within 24 months

e) Any other Assets – Sold within 36 months

2) Long Term Capital Gains – Capital Assets sold after holding for a period as prescribed above ie; Assets which are not classified as Short Term Capital Asset

Rules for set off of losses within the same head of Income :-

As per S-70(1) – Loss from any head of income other than capital gains can be adjusted against same head of income

As per S-70(2) – Loss from Short Term Capital Asset can be set-off against gains from any capital asset including Long Term Capital Gains (LTCG) ie; STCL can be adjusted against any other STCG or LTCG

As per S-70 (3) – Loss from Long Term Capital Asset can be set-off against gains from any other Long term capital asset only ie; LTCL can be adjusted against any other LTCG alone

1) Say, SRK LLP during the FY 2019-20 earned the following income :-

a) STCL from sale of Listed Shares u/s 111A – (5 Crores )

b) LTCL from Sale of Listed Shares u/s 112A – (2 Crores)

c) LTCG from Sale of unlisted Shares of a Pvt Ltd Company – 10 Crores

The Income will be computed as follows :-

STCG – (5 Crores)

LTCG – 8 Crores

Net LTCG – 3 crores taxable @ 20% u/s 112, instead of paying tax on entire 10 crores of gains

2) Say, IPL LLP during the FY 2019-20,

a) Purchased and Sold certain listed shares and incurred STCL of 10 Crores ;

b) Sold a property for Rs.20 Crores, and earned LTCG of Rs.12 Crore.

In the given scenario IPL LLP, will have to pay tax @ 20% on gains of 2 crores ( 12-10) alone and not on full 12 Crore. Further in case exemptions under capital gains can also be computed if again a new property is purchased

3) Say, Pichai an individual has purchased 50,000 shares of Jet Airways Ltd @ 775 /- in FY 2014-15 and is planning to liquidate his one of the property the LTCG from which is about Rs.4 Crores.

Assuming the current market price of Jet Airways Rs.25 each, then Pichai may sell the shares and claim an LTCL of Rs.3.75 Crores and set off the loss against LTCG of 4 Crores and just pay tax of Rs.5Lacs on LTCG of 25 Lacs @ 20% instead of paying of Rs.80 Lacs on LTCG of 4 Crores @20%

Rules for Inter Head Loss adjustments:

As per S-71, Loss from Capital gains cannot be adjusted against any other head of Income, however loss from other heads of income can be adjusted against any other capital gains.

Note : Income from Salary cannot be set off against Loss from Business or profession, Loss from Speculation Business cannot be set off against any other head of income.

Say, MSD an Individual during the FY 2019-20 has incurred a Loss from Futures & Options of Rs.2 Crores. Also has sold 1,00,000 shares of Infosys @ 800 /- each which was originally bought at Rs.150/- each in FY 2008-09 and the price as on 31.1.2018 was Rs.583/- each.

The Income will be computed as below :-

Loss from Business Income – (200 Lacs )

Income from LTCG on sale of Listed Shares – 217 Lacs ( 1,00,000 * (800-583) )

The tax payable will be only on 17 Lacs @ 10% u/s 112A and not on 217 lacs

Rate of Tax :

S.NO	Type	Provision	Rate (%)
1	STCG on Sale of Listed Securities	S-111A	15
2	STCG on sale of other capital assets	NA	Taxed like any other income
3	LTCG on Sale of any other capital Assets	S-112	20 on Indexed Cost
4	LTCG on Sale of Listed Shares	S-112A	10 after considering grandfathering provisions

In the FY 2019-20 there were many listed companies which had substantially fallen down the investments value to a minimal value ( few of them were DHFL, Jet Airways, Manpasand Beverages, Yes Bank ), one may as well plan the income under the head of capital gains for the year and pay tax wisely in case if the investments are to be written off.

Carry forward and Set off of Losses :

The losses if any arising in a financial year is not set off with any other income then such losses can be carried forward for either 8 years or 4 years depending on the type of loss, however the carried forward losses in the next financial year cannot be set off with any other head of income (except in case of loss arising on account of unabsorbed depreciation ) ie; Carried forward losses can be set off only with the same head of income and not with any other head of income.

Note : Ideally even recognition of Deferred Tax Asset as per AS-22 will be required to be made if there is a visibility of future profits if any in the financial statements.

Further in order to carry forward the losses arising from Business Income, Speculation Business, Specified Business, Capital Gains and Other Source of Income, the income tax return has to be mandatorily filed within the due dates prescribed u/s 139(1) ie; July 31^st or 30^th Sept etc;