Carry Forward and Set-Off of Capital Loss under the head 'Capital Gains' (Section 74)

Capital gains can be a significant part of an individual's investment portfolio. However, it is essential to understand the provisions related to capital loss as well. In this article, we will discuss the concept of carry forward and set-off of capital loss under the head 'Capital Gains' as per Section 74 of the Income Tax Act.

When an individual sells a capital asset such as property, stocks, or bonds, and makes a profit, it is considered a capital gain. Conversely, if the individual incurs a loss on the sale, it is referred to as a capital loss. The Income Tax Act allows individuals to carry forward and set-off these capital losses to reduce their tax liability.

Section 74 of the Income Tax Act deals specifically with the carry forward and set-off of capital loss. According to this section, if an individual incurs a capital loss in a particular financial year, it can be carried forward for up to eight assessment years immediately succeeding the year in which the loss was incurred.

The carried forward capital loss can be set-off against any capital gains made in the subsequent years. The set-off can be done against both short-term capital gains (STCG) and long-term capital gains (LTCG). However, there are specific rules that need to be followed for setting off capital losses:

• Inter-source Set-off:

A capital loss can be set-off against capital gains from any other source. For example, if an individual incurs a loss from the sale of stocks, it can be set-off against the capital gains from the sale of property.

• Inter-head Set-off:

A capital loss can also be set-off against income from other heads, such as salary, business income, or income from other sources. However, there are certain limitations on the amount of loss that can be set-off against income from other heads.

• Carry Forward:

If the capital loss cannot be fully set-off in a particular financial year, the remaining loss can be carried forward to the next year. The carried forward loss can then be set-off against capital gains in the subsequent years.

Conditions for Carry Forward:

• The capital loss must be a long-term capital loss or short-term capital loss, as the case may be.
• The capital loss can be carried forward for up to 8 assessment years immediately following the assessment year in which the loss was first computed.
• The taxpayer must file an income tax return within the specified due date to claim the carry forward of capital losses.
• Furthermore, the set-off of capital loss can only be done against capital gains and not against any other form of income, such as interest or dividends.

Set-Off of Capital Losses:

The taxpayer can set off the carried forward capital loss against any capital gains they may have in subsequent years. The set-off can occur under the following conditions:

• Long-term capital losses can be set off only against long-term capital gains.
• Short-term capital losses can be set off against both short-term and long-term capital gains.

Order of set-off

Capital losses are set off against capital gains in the following order:

• Short-term capital losses against short-term capital gains.
• Long-term capital losses against long-term capital gains.
• Any remaining long-term capital losses against short-term capital gains.
• Short-term capital losses against long-term capital gains (if there are no short-term capital gains)
• Long-term capital losses against short-term capital gains (if there are no long-term capital gains)

If the capital loss cannot be fully set off in the year in which it is incurred, the balance loss can be carried forward to the next year and set off against capital gains in that year. This process can be continued for up to Eight(8) financial years.

Example :

Suppose you incurred a short-term capital loss of Rs. 10 lakh in the financial year 2022-23. You can set off this loss against your short-term capital gains in the financial year 2023-24. If you do not have any short-term capital gains in the financial year 2023-24, you can carry forward the loss to the financial year 2024-25 and set it off against your short-term capital gains in that year.

If you also have long-term capital gains in the financial year 2023-24, you can set off your short-term capital loss against your long-term capital gains.