Introduction

It would be unfair if an individual was taxed on one part of his income when he has incurred capital losses from another source and it is yet to be written off. Keeping this in mind the legislature affected the provisions of set-off and carry forward of losses so that an assessee would not have to bear the burden of paying taxes in the case of losses.

The most basic principle of taxation is that there is a tax only if there is income and on that, he is required to file income tax return.

If an assessee does not have income in a particular year he is not liable to pay tax but may claim a setoff or carry forward any loss incurred in that year to be adjusted against any income in the subsequent years.

How to Set off & Carry Forward Capital Losses

Depending upon the nature of loss , i.e. from which of the five sources of income namely salary , business and profession , capital gains , house property and other sources have they been incurred, capital losses can be either set off amongst different sources and any loss in excess of the amount set off is carried forward to the next year.
However, there are certain rules of set-off and carry forward.

Set off of Capital Losses: The Income Tax does not allow Loss under the head Capital Gains to be set off against any income from other heads – this can be only set off within the ‘Capital Gains’ head. Long Term Capital Loss can be set off only against Long Term Capital Gains. Short-Term Capital Losses are allowed to be set off against both Long Term Gains and Short Term Gains.

Carry Forward of Capital Losses: If an individual is not able to set off his are not able to set off his entire capital loss in the same year, both Short Term and Long Term loss can be carried forward for 8 Assessment Years immediately following the Assessment Year in which the loss was first computed. If Capital Losses have arisen from a business, such losses are allowed to be carried forward and carrying on of this business is not compulsory.

capital losses

Treatment of Long-term Loss on Shares and Equity Funds: There is no tax on Long-Term Gains on Shares & Equity Funds If Capital Losses have arisen from a business, these losses are allowed to be carried forward and carrying on of this business is not mandatory. Similarly, Long Term Capital Loss on Shares and Equity Funds is a dead loss and therefore it cannot be set off or carried forward. Equity funds and shares are the long term assets when it is held for more than 1 2 months

Mandatory Filing of a Return- 

Mandatory filing of return can be carried forward until and unless that year’s return has been filed before the due date

 It is mandatory for an individual to track losses of business, the Income Tax Department has laid out that Losses for a year cannot be carried forward unless that year’s return has been filed before the due date. Even, you do not have any income to show – do file your return before the due date if it’s a loss return.

Under the act, business has been classified as 3 type normal business, speculative business, and specified business.
While the term normal business is self-explanatory, the terms speculative and specified business need to be clarified to understand the provisions of set off.

Speculative business

 Speculative business would involve business related to or involving trading in speculative assets such as equities, bonds, and stock markets. In the case of speculative business, loss in the previous year can be set off against any income but can be carried forward for adjustment against income from that respective business only.
Moreover, losses from a speculative business can be carried forward for 4 assessment years only from the date of which loss was incurred.

Specified business,

Specified Business is the business specified by the government or avenues where the government is willing to provide special benefits or concessions to entrepreneurs investing therein. Examples of specified businesses are operating a cold chain facility, agricultural produce warehousing, slum redevelopment housing, and hospitals with more than 100 beds and so on. On the other hand losses from the specified business can be set off and carried forward for adjustment from income through any other specified business only.
However, losses from specified business and unabsorbed depreciation that has not be adjusted may be carried forward for an unlimited number of years till they are finally adjusted.

Normal business

Losses can be set off against income from any other source in the previous year however once they are carried forward to the next year they can be adjusted against business income only. These can be carried forward for a maximum period of 8 assessment years following the year in which the loss was incurred.

Not only this, while a timely return of losses is required to be filed in the case of normal and speculative business losses if they are to be carried forward, losses from the specified business can be carried forward even if belated returns have been filed.
Further rules have been specified for carrying forward of losses in case of different forms of business such as partnership,  company as well as for different structural changes such as corporate mergers, amalgamations, and demergers between two or more entities.

Similarly, losses of capital nature can also be set off and carried forward based on certain rules. Any loss on sale of asset owned for a period less than 3 years (1 year in the case of shares and securities) is short-term capital loss while any loss on sale of asset owned for greater than 3 years in the long term the capital loss.

For any help on ITR Filing feel free to consult the tax experts at LegalRaasta. You can file ITR yourself via our ITR software or get CA’s help on filing income tax return. You can also use the option of Business Return, Bulk Return or Revised Return Filing.