Incurred a capital loss? Here is how you can set it off in your tax returns

If an investment you made incurred a loss then this is how you can make the most of the situation

Saving money for your future is always good. With this intention, most of us make investments in various assets to build wealth over a period of time. Investments in real estate, equities, debentures, gold and debt oriented mutual funds, etc. are referred to as investments in capital assets. At the time of sale, one expects these investments to yield a healthy return. However, things may not go according to plan and you may incur a loss. Let’s understand how you can make the most of this situation. 

When does Capital Loss arise?

While the profit you make when you sell a capital asset results in capital gains, if there is a loss on such sale, such losses are known as capital losses. Further, the nature of your loss depends on time for which you have held the capital asset. Some losses are short term, and some are long term losses.

If an asset is held for more than 2 years then losses would have been long term and calculated after indexing the cost of purchase. 

Can capital losses be carried forward and set off against income of future years?

When a taxpayer has incurred a capital loss, the income tax act allows you to set off or carry forward the losses. The rules relating to set off and carry forward differ for different sources of income. Here, the rules regarding set off and carry forward of capital losses have been discussed:

Setting off capital loss:

Setting off losses means that one can adjust current year losses against current year’s income. Capital losses are allowed to be set off only against income from capital gains. These cannot be set off against any other income. 

Assuming a tax payer has a capital gain of Rs 20 lakhs from sale of one residential property and capital loss of Rs 10 lakhs from another property, he can set off such capital loss of Rs 10 lakhs against the income, thereby enabling him to set off his capital losses entirely which in turn contributes in reducing his taxable income and resultantly reducing his tax outgo.

Carry forward of capital loss:

If in a financial year, the taxpayer does not have enough income against which he can set off his losses, he is entitled to carry forward the losses to future years for set off against income of future years.

Coming back to the same example, had the capital gain from the other house been Rs 4 lakhs only, the tax payer would have been able to adjust only Rs 4 lakhs of his capital losses during the year under consideration and would have has to carry forward the unadjusted capital losses of Rs 6 lakhs to future years.

Key points to remember as regards set off and carry forward of capital losses

A taxpayer must remember these crucial points as regards the rule of set off and carry forward of capital losses

• Capital losses can be carried forward for a period of 8 years;

• Short term capital losses can be set off against long term capital gains as well as short term capital gains; and 

• Long term capital losses can only be set off against long term capital gains

Setting off losses in the income tax returns

It is mandatory to file your income tax return on or before the due date for filing returns to be able to carry forward your capital losses. Therefore, filing a return belatedly i.e. after the due date may make you ineligible to carry forward your losses.

In the income tax return, there is Schedule CYLA which gets auto populated with details of your capital losses from Schedule CG and gives you the income of the year after setting off capital and other losses. Similarly, if you had any capital losses in previous years and you had filed your return of taxes on or before date, you can set off such brought forward capital losses with eligible capital gains in the Schedule-BFLA, which are available after the current year adjustments.

In addition to the above, you have to provide a summary of eligible losses carried forward from earlier years under different heads of income in Schedule- CFL of income tax return which will need the date of return filing, the amount carried forward and the head of income under which it is to be carried forward.

Archit Gupta is founder and CEO, ClearTax