Set-off of capital losses

Setting-off of capital losses allows you to reduce your overall tax liability

Did you know that you can save tax by setting-off capital losses on financial investments such as shares and mutual funds with capital gains recorded on the same?

As per the Income Tax Act 1961, capital gains or losses arise when financial instruments such as shares and mutual funds are sold at a profit/loss. These gains or losses can be long-term or short-term, based on the holding period (i.e. the time period between purchase and sale). In case of the former, the holding period should be more than one year, else the gains/losses are termed as ‘short-term’.

Setting-off of capital losses allows you to reduce your overall tax liability. The income tax department has laid down certain rules towards it:

Losses incurred under the income head ‘capital gains’ cannot be set-off against income earned under other heads of income such as salary, rent from house properties, business or profession and other miscellaneous sources

Long-term capital loss can be adjusted (set-off) only against long-term capital gain

Let’s say: You have incurred a long-term capital loss of Rs. 2,000, a long-term capital gain on Rs. 2,000 and a short-term capital gain of Rs. 1,000. The long-term capital gain will be set-off against the long-term capital loss and your tax liability will be restricted to the short-term capital gain of Rs. 1,000.

Short-term capital loss can be settled against any long-term or short-term capital gain. For example: You incurred a short-term capital loss of Rs. 1,000 and earned a long-term capital gain of Rs. 2,000. The short-term capital loss will be off-set against the long-term capital loss, and you will be taxed only on the balance long-term capital gain of Rs. 1,000.

If any capital loss cannot be compensated with the capital gain of that particular year, then, it is allowed to carry forward for the next eight years. However, such loss would be allowed to carry forward only when the income tax return is filed within stipulated period Assuming, you filed a capital loss in the AY 2011-12 but didn’t earn any capital gains in the same year, the loss can be carry forward till AY2019-20.

The above article is contributed by IndiaFirst Life Insurance.

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