Set off and carry forward of capital losses (as set, 1961 Act, AY 2018-19)

A loss under the head Capital gains is kept within that head: it can be used only against capital gains, in the same year or in later years, and a long-term loss is more restricted than a short-term one.

Set off in the year of the loss

1. Short-term capital loss. A loss on the transfer of a short-term capital asset may be set off against the gain on any other capital asset of the same year, whether that gain is short-term or long-term (section 70(2)).
2. Long-term capital loss. A loss on the transfer of a long-term capital asset may be set off only against a long-term capital gain of the same year (section 70(3)); it cannot reduce a short-term gain.

No set off against other heads

If the head Capital gains ends the year in loss, the loss cannot be set off against salary, house property, business or other sources (section 71(3)). The reverse is allowed: a loss under another head (other than a business loss against salary) may be set off against capital gains (section 71(2)). From assessment year 2018-19, however, a loss under Income from house property may be set off against income under any other head, capital gains included, only up to ₹2,00,000 for the year (section 71(3A)).

Carry forward

The loss not absorbed in the year is carried forward to the next assessment year (section 74(1)) and set off there:

• a short-term capital loss against any capital gain, short-term or long-term (section 74(1)(a));
• a long-term capital loss only against a long-term capital gain (section 74(1)(b));
• any balance goes forward again, year by year (section 74(1)(c)), but for no more than eight assessment years after the year in which the loss was first computed (section 74(2)).

It does not matter that the asset sold in the later year is of a different kind from the one that gave the loss.

Return of loss

A capital loss can be carried forward only if it was determined on a return filed within the time allowed by section 139(3), that is by the due date of section 139(1) (section 80).

Example

For assessment year 2018-19 Mrs. Neha has a short-term capital loss of ₹70,000 on shares, a long-term capital loss of ₹1,20,000 on a plot, a long-term gain of ₹50,000 on gold and salary of ₹6,00,000. The short-term loss absorbs the long-term gain of ₹50,000 (section 70(2)), leaving ₹20,000 of short-term loss. Neither the ₹20,000 nor the long-term loss of ₹1,20,000 can touch her salary; both are carried forward, the first against any capital gain and the second against long-term gains only, for up to eight years, if her return is filed in time.