scorecardresearchHow to set off and carry forward capital losses suffered in the market?

How to set off and carry forward capital losses suffered in the market? MintGenie explains

Updated: 01 Jul 2023, 11:16 AM IST

Taxpayers can set off their long-term capital losses against long-term capital gains only whereas short-term capital losses can be offset by either long-term or short-term capital gains.

How to set off capital losses against capital gains from stocks and mutual funds?

How to set off capital losses against capital gains from stocks and mutual funds?

The income generated or the trading outcome from the stock market can be categorized into three types: capital gains/losses, business income/loss, and speculative income/loss. Depending on the nature of the transactions, income from the stock market deals may be subject to taxation either as capital gains on investment or as profits and gains from a business or profession.

The income derived from the stock market investments is further classified into long-term capital gains and short-term capital gains. Short-term capital gains are subject to a flat tax rate of 15 per cent regardless of an individual's tax bracket if equity shares listed on a stock exchange are sold within 12 months of their purchase. Both the buyer and seller may realize short-term capital gains or face short-term capital losses based on the outcome of the transaction.

While calculating capital gains, if you find that the sale receipts from a capital asset are less than the cost of acquisition (adjusted for inflation, if relevant) and transfer expenses, you will realize that you have suffered a capital loss instead of a capital gain.

The tax treatment of the stock market income will vary based on the specific circumstances and the categorization of the income. It is important to determine the appropriate category and comply with the tax regulations accordingly.

While capital gains are taxed based on the applicable tax rate, taking into account factors such as the type of asset and whether it qualifies as a long-term or short-term gain, capital losses are handled differently.

Adjusting capital losses against capital gains

As per the regulations stipulated under the Income Tax Act, 1961, you cannot claim and offset losses incurred under the category of capital gains against income from other categories. Such losses can only be offset against gains within the “Capital Gains” category itself.

Specifically, long-term capital losses can only be offset by long-term capital gains. On the contrary, short-term capital losses are permitted to be set off against both long-term gains and short-term gains. This means that equity shareholders have the ability to offset stock market losses against gains, allowing them to reduce their tax liability. They can also carry forward any remaining losses to future financial years for further offsetting.

Furthermore, if a shareholder is unable to fully set off their entire capital loss in the same assessment year, they have the option to do it against any short-term or long-term capital gains under the category of “other sources of income” as per Section 35AD of the Act.

Where the holding period exceeds a year, the long-term capital gains are taxed at a rate of 10 per cent without the benefit of indexation if it exceeds 1,00,000 under Section 112A of the Act. On the other hand, in the case of a capital loss, it can be adjusted against long-term capital gains for a period of eight years.

In the case of intra-day trading, where shares are bought and sold on the same day, the capital gains generated from these transactions are categorized as speculative business income. This means that the profits obtained from intra-day trading will be treated as income derived from speculative business activities for taxation purposes. It is important to comply with the relevant tax regulations and report such income accordingly.

This income is subject to taxation based on your applicable tax slab rates. Similarly, any capital losses incurred from such transactions can only be set off against speculative income for a period of four years. It is important to comply with the tax regulations and consider the specific treatment of speculative income and losses in this context.

Carrying forward capital losses

To carry forward losses to the subsequent eight assessment years, it is essential for the taxpayer to file their Income Tax Return (ITR) on time as per Section 139(1) of the Income Tax Act. According to the Act, losses incurred under the head “Profits and gains of business or profession” can be carried forward even if the return of income/loss for the year in which the loss was incurred is not filed by the due date prescribed under Section 139(1).


First Published: 01 Jul 2023, 11:16 AM IST