Set off and carry forward of Capital Gain under Income Tax

Long-term capital loss can be set off only against long-term capital gains. Short-term capital loss can be set off against short-term or long-term capital gains. Such loss can be carried forward for 8 (eight) assessment years immediately succeeding the assessment year in which the loss was first computed.

A summary of provisions dealing with set off and carry forward of Capital Gains under the Income Tax Act are discussed below :

Capital Gains are of two types:-

1) Short Term Capital Gains:-

Short-term gains are taxed as regular income according to tax brackets up to 37%, as of 2020. Long-term gains are subject to more-favorable rates of 0%, 15%, and 20%, also based on income. Short-term gains result from selling property owned for one year or less.

a) Sale of listed securities – Sold within 12 months

b) Sale of a unit of UTI or unit of an Equity Oriented Fund or a Zero Coupon Bond – Sold within 12 months

c) Sale of unlisted share – Sold within 24 months

d) Sale of immovable property – Sold within 24 months

e) Any other Assets – Sold within 36 months

2) Long Term Capital Gains – 

Long-term capital gains or losses apply to the sale of an investment made after owning it 12 months or longer. Long-term capital gains are often taxed at a more favorable tax rate than short-term gains. Long-term losses can be used to offset future long-term gains.

Rules for set off of losses within the same head of Income:-

“Set-off” means adjustments of losses against the profit from another source/head of income in the same assessment year. If losses cannot be set-off in the same year due to inadequacy of edible profit, then such losses are carry forward to the next assessment year for adjustment against the eligible profit of that year.

Rules for Inter Head Loss adjustments:

Given below are few more such instances of an inter-head set off of losses:

1. Loss from House property can be set off against income under any head

2. Business loss other than speculative business can be set off against any head of income except income from salary.

One needs to also note that the following losses can’t be set off against any other head of income:

a. Speculative Business loss

b. Specified business loss

c. Capital Losses

d. Losses from an activity of owning and maintaining race-horses

Carry forward and Set off of Losses :

The losses if any arising in a financial year is not set off with any other income then such losses can be carried forward for either 8 years or 4 years depending on the type of loss, however, the carried forward losses in the next financial year cannot be set off with any other head of income (except in case of loss arising on account of unabsorbed depreciation ) ie; Carried forward losses can be set off only with the same head of income and not with any other head of income.

Further, in order to carry forward the losses arising from Business Income, Speculation Business, Specified Business, Capital Gains and Other Source of Income, the income tax return has to be mandatorily filed within the due dates prescribed u/s 139(1) ie; July 31st or 30th Sept, etc.