Have you ever come across any discount vouchers?
If yes, then you can relate that with income tax losses.
A discount voucher cannot be encashed, however, it can be used for purchasing selected goods or services.
Similarly, under Income tax act, loss arising from an “income head” can be set off with prescribed income head only and government never compensate for that loss.
In many cases, losses are taken ahead to 8 assessment years for setoff purpose.
Under income tax we have 5 income heads:
- Income From Salary
- Income from House Property
- Income From Business and Profession [PGBP]
- Capital Gain
- Income From other sources
Each head has its own rule for setoff and carryover.
In this article, we will cover set off and carry forward rule for the income head “Capital Gain”.
Let’s first see the basic rule!
Basic Rule For Set Off and Carry Forward
Loss from an exempted source of income cannot be adjusted against taxable income.
Example: Loss on sale of long-term listed Equity Share is neither eligible for set off nor for carry forward. [Applicable For Assessment Year 2018-19]
But from AY 2019-20, LTCG on such equity instruments exceeding Rs.1 lakh are to be taxed at 10% and loss arising from a sale of such instruments on or after April 1, 2018, can be set off and carried forward. [Introduced in Budget 2018]
Recommended to Read: LTCG Tax on Sale of Listed and unlisted Shares
Set Off and Carry Forward of Capital Losses [Under Section 74]
Based on the period of holding, capital Gain (also include loss) are divided into 2 parts:
- Short-Term Capital Gain [STCG]
- Long-term Capital Gain [LTCG]
Short-Term Capital Gain [STCG]
Law doesn’t permit the set off of a capital loss with other 4 income heads. [Inter head setoff not allowed]
However, a short-term capital loss can be set off with both short term and long term capital gain during the financial year. [Intra head setoff allowed]
Further, if such loss is not fully adjusted with the gain/profit under the head “Capital Gain” then such loss can be carried forward to the next 8 years until the loss is finally adjusted. [Also known as unabsorbed Losses]
Long-Term Capital Gain [LTCG]
Similar to STCG, loss on long-term capital asset can’t be set off with other heads of income.
A long-term capital loss can be set off only with a long-term profit/gain.
In other words, a long-term capital loss cannot be set off with a short-term capital gain.
If an LTCG loss is not fully adjusted with the LTCG gain/profit of other long-term capital assets then such loss can be carry forward to the next 8 years until the loss is finally adjusted.
Example: A LTCG loss in the assessment year 2018-19 can be carried forward till the assessment year 2026-27
File Income Tax Return to Carry Forward Loss
In order to carry forward both LTCG and STCG losses, a taxpayer should file a loss income tax return (ITR) within the prescribed due dates. [under section 139(3)]
For the purpose of loss carry forward, Capital loss in a revised return is also a valid return even if the original return was without any loss.
For an individual taxpayer, the due date to furnish ITR for AY 2018-19 is 31st July 2018.
Recommended to Read: Late Fees for Delay in Filing Income Tax Return
A capital asset held up to 36 months is considered as short-term capital assets.
However, for various other capital assets government has reduced this 36 month period to–
- 12 months for listed equity or preference shares, units of equity oriented mutual funds, listed debentures and Government securities, Units of UTI and Zero Coupon Bonds.
- 24 months for unlisted shares of a company. [From AY 2017-18]
- 24 months for an immovable property being land or building or both. [From AY 2018-19]
Any capital asset outside the definition of a short-term capital asset can be considered as a long-term capital asset.