Capital Loss: How to Set off & Carry Forward

The profit (or gain) made by selling a capital asset is known as capital gain. Similarly, the loss made by selling a capital asset is known as capital loss. In my previous blog "Mutual Fund Taxation Rules" i explained how capital gain is taxed. But what about the capital loss? How capital loss is treated for tax while filling ITR? You need to set off capital loss from capital gain or from salary income?

Similar to capital gains, capital loss can also be classified as short term loss and long term loss. Capital assets other than stocks and equity mutual funds include Debt funds, Gold etc

Short Term Capital Gain/Loss – (STCG / STCL)

• For Equity funds, if you make any profit or loss by selling units that you have held for less than 1 year will be classified as short term capital gain or loss.
• For capital assets other than stocks and equity mutual funds, if you make any profit or loss by selling asset that you have held for less than 3 years will be classified as short term capital gain or loss.

Long term Capital Gain/Loss – (LTCG / LTCL)

• For Equity funds, if you make any profit or loss by selling units that you have held for more than 1 year will be classified as long term capital gain or loss.
• For capital assets other than stocks and equity mutual funds, if you make any profit or loss by selling asset that you held for more than 3 years will be classified as long term capital gain or loss.

How to Set off Capital Loss

Capital loss from equity or non-equity asset cannot be set off against incomes arising under following heads - 

• Income from Salary
• Income from other sources like interest from Fixed Deposit FD or RD
• Income from Business
• Rent from house property (not from sale from sale of property)

Capital loss can be set off against capital gains and there are several rules to set off which are mentioned below.

• Long term capital gains from equity are tax exempt, therefore, cannot be used to set off any loss whatsoever. Thumb rule is exempted income cannot be used to set off any kind of loss, whether it is long term capital gain on equity or agricultural income or interest from PPF.
• For the above reason, Long term loss from equity is a dead loss and cannot be set off against any gain.
• Long term loss from non-equity asset can be set off against long term gain only.
• Short term loss from equity or non-equity asset can be set off against short term gain as well as long term gain.

	Type of Fund	Holding Period Rule	Capital Gain Tax	Capital Loss set off against
	Equity Mutual fund or stocks	Short term : Less than 1 year	15%	- Short term capital gain from any asset - Long term capital gain from any asset other than equity (stocks and equity MFs)
		Long term : more than 1 year	Exempted	Cannot be set off, its a dead loss
	Debt Oriented funds, Gold, International funds, fund of funds	Short term : Less than 3 years	Income tax slab rate	- Short term capital gain from any asset - Long term capital gain from any asset other than equity (stocks and equity Mfs)
		Long term : more than 3 years	20% (with indexation)	Long term capital gain from any asset other than equity (stocks and equity Mfs)

Carry Forward Capital Loss

If a capital loss cannot be set off against some head during the same year, it can be carried forward to next year and can be set off against the capital gains made during next year. Like this, capital loss can be carried forward for 8 years from the end of year in which loss was incurred.

To carry forward your capital loss, you need to declare such losses in our ITR and the tax return need to be filed before due date. If the ITR is filed after due date, capital loss would not be carried forward to the next year. However, if the income tax return was filed before due date and later a revised return is filed, then the loss declared would be allowed to be carried forward.

However, long term capital loss from equity can not be carried forward as it can not be set off against any gain or income.

                                                                    Example 1                                                               

Say, you made a short term capital gain of Rs 60,000 on an equity fund. You also made a short term capital loss on a debt fund of Rs 20,000 in the same year. You can set off this short term loss from debt fund against short term capital gain from equity fund. You need to pay tax only on Rs 40,000.

If you had a long term capital loss from debt fund instead of short term capital loss than you can not set off this loss and you need to pay tax on Rs 60,000 @15% irrespective of your income tax slab rate.


                                                                    Example 2                                                               

Say, you made a long term capital gain of Rs 60,000 on an equity fund. You also made a short term capital loss on a debt fund of Rs 20,000 in the same year. You can not set off this loss. You can carry forward this loss to next year. Since, long term capital gain from equity is exempted from tax, you need not to pay any tax on Rs 60,000.

Set off capital loss against other assets

• You can set off long term and short term capital loss against gain made from other capital assets (which is not tax exempted) such as gold, capital gain from property. 
• If the income from particular source is exempted from tax, then this income can not be used to set off any loss. For the similar reason, long term capital gain from equity can not be used to set off any loss. Another example is, Agricultural income. If you make any loss from agricultural activity, then that loss cannot be set off against any other income head.

                                                                    Example 3                                                               

Say, you made a long term capital gain of Rs 60,000 on an equity fund. You also made a short term capital loss on a debt fund of Rs 20,000 in the same year. You can not set off this loss against long term capital gain from equity. If you made a short term or long term gain of Rs 20,000 on a gold fund, then you can set off the loss from debt fund against the gain made from gold fund.

Set off loss from intra-day trading

Profit or loss from intra day trading is considered as speculative gain or speculative loss. Income from speculation gain is taxed as per standard slab. Any speculative loss made from intra day trading can be set off against speculative gain, it can not be set off against capital gain.

However, if shares are purchased on a particular day and are sold next day, it is not considered as speculative business. The profit or loss on sale of such shares is taxed as short term capital gain from equity.