A capital asset has been defined under section 2(14) of the Income Tax Act. Any gain arising from the transfer of the capital asset is termed as capital gain it can be short term or long term. And when there is a loss on the transfer of a capital asset, the loss termed as a capital loss (can be short term or long term loss).
In other words, while calculating your capital gains where the sale proceeds from a capital asset is less than the cost of the asset acquired and expenses on transfer – instead of a capital gain you incur a capital loss.
Set-off of Capital Losses:
As per the provisions contained under the Income Tax Act, it does not allow the taxpayer to be set off the capital loss against any income from other heads. This simply means that this loss under the head “Capital Gains” can be only set off within the “Capital Gains” head. In addition to this, long term capital loss on any asset can be set off only against long term capital gains. Long term capital loss on any capital asset cannot be set off against short term capital gain but short term capital losses are allowed to be set off against short term as well as long term capital gains.
Mr Ram Shankar Nikumbh acquired a house property in the year 2010 in Navi Mumbai. The property was acquired from his friend for a consideration of Rupees 50,00,000.
The said property being sold at Rupees 80,00,000 to Mr Ishan Nandkishor Avasthi in the previous year 2019. The indexed cost of acquisition of the property in the previous year 2019 was 95,00,000 (Stamp Duty value is at par as well). Therefore, the property is being transferred at a loss of 15,00,000 (sale consideration – index cost of acquisition). The loss incurred on the transfer of the property is a long term capital loss as the house property is being held for more than 36 months.
Suppose, in the same example if Mr Ram Shankar Nikumbh has a long term capital gain of Rupees 10,00,000. Mr Nikumbh can utilize the loss to set off against the long term capital gain to the extent of Rupees 10,00,000. The remaining long term capital loss can be carried forward by Mr Nikumbh for next 8 assessment years.
Carry Forward of Losses:
Where the assessee is unable to set off the entire capital loss (both short term and long term) in the same year, the capital loss can be carried forward up to next 8 Assessment Years immediately following the assessment year in which the loss was first computed. However, where the capital losses have arisen from a business, such capital losses can be carried forward and carrying on of this business is not compulsorily required.
Treatment of loss on the transfer of Shares and Equity Funds:
Where the assessee has incurred a long term capital loss on the transfer of shares or units of equity-oriented mutual after 31st of March,2018 then the assessee can set them off against any Long Term Capital Gain, as profits/gains on long term shares or equity funds are now taxable in excess of Rupees. 1 lakh. This amendment was inserted in the Budget of 2018. Also, the assessee can carry forward such losses for setting off in later years up to the next 8 assessment years.
Earlier to Budget 2018, transfer of long term shares and equity-oriented mutual funds units were exempt from tax as per the virtue of section 10(38) of the Income Tax Act (now removed). Therefore, any long term gains arising on transfer of shares & equity equity-oriented funds were considered as a dead loss and was not allowed to set off or carried forward.
Shares and Units of Equity Oriented Funds are long term capital assets if held for more than 12 months.
Mandatory filing of Return of Income:
To keep a track of losses, CBDT has made it clear that losses for a year cannot be carried forward unless that year’s return has been filed before the due date (as specified under section 139). Even if it’s a loss return, where the assessee does not have any income to show – is also required to file the income tax return before the due date.
|S. No.||Provisions of Set of and Carry Forward of Losses under Income Tax Act, 1961|
|1||Clubbing of Your Income with Income of your Spouse|
|2||Clubbing of income from assets transferred to Son’s Wife|
|3||Clubbing of income from the asset transferred to Spouse|
|4||Clubbing of Income on Revocable Transfer of Asset|
|5||Clubbing of remuneration income of Spouse from a Concern in which other Spouse has Substantial Interest|
|6||Set Off & Carry Forward of Loss under the head House Property|
|7||Clubbing of income of a Minor Child with Income of parent|
|8||Clubbing of Income from Self-acquired Property converted to Joint Family Property & subsequent Partition|
|9||Clubbing of Income from assets transferred to a person for benefit of spouse|
|10||Clubbing of Income from Assets Transferred to a Person for the Benefit of Son’s Wife|
|11||Carry forward & set off of Business Losses other than Speculation Loss|
|12||Set off and Carry Forward of Capital Loss|
|13||Set-off and carry forward of Speculative Business Loss|
|14||Set-off & carry forward of Loss from owning & maintaining racehorses|
|15||Set off and carry forward of losses of Specified Business | Section 73A|