Set off of capital loss

Loss, in simple terms, means excess of expenses over income. Loss arises when income earned during the financial year by the taxpayer is less than the expenditures incurred by him during the year. There might be house property loss or capital loss or loss from business/profession/other income.

The assets which are held by the taxpayer as an investment are treated as Capital Assets under the Income-tax Act, 1961. Capital asset might be a building, land, or even shares and securities, etc. If the taxpayer sells his capital asset at a greater value than the purchase price, he will gain from such capital asset. However if the sale proceeds of any capital asset are less than its purchase price, then it results in capital loss.

For the sake of brevity in taxation matters, capital Losses are classified as i) Long term capital loss and ii) short term capital loss under Income-tax Act, 1961.

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i) Long term capital loss-

Income-tax Act, 1961 has provided following rules for set-off and carry forward of long term capital loss:

1. Long term capital loss can be set-off against long term capital gain only. That is set-off of long term capital loss is not possible against other incomes.
2. If capital loss still exists then it can be carried forward to next financial year.
3. Capital Loss can be carried forward to next 8 financial years. If the capital loss still persists after 8 financial years, then such loss shall be forgone.

ii) Short term capital loss-

Income-tax Act, 1961 has provided following rules for set-off and carry forward of short term capital loss:

1. A short term capital loss can be set-off against long term as well as short term capital gain. However, set-off of short term capital loss is not possible against other heads of incomes.
2. If capital loss still exists then it can be carried forward to next financial year.
3. Capital Loss can be carried forward to next 8 financial years. If the capital loss still persists after 8 financial years, then such loss shall be forgone.