Carry forward and set off of capital loss (Sec 74) is a provision under the Income Tax Act of India that allows taxpayers to set off capital losses against capital gains in subsequent years. This provision is available to all taxpayers, regardless of their income or profession.

Conditions for carrying forward and setting off capital loss

To carry forward and set off capital loss, the following conditions must be met:

• The loss must be incurred from the sale or transfer of a capital asset.
• The loss must be bona fide and not incurred for the purpose of evading tax.
• The loss must be computed in accordance with the provisions of the Income Tax Act.
• The loss must be carried forward to the next four assessment years from the assessment year in which the loss was incurred.
• The loss can be set off against capital gains in the next four assessment years.

Types of capital loss

There are two types of capital loss: short-term capital loss and long-term capital loss.

• Short-term capital loss is a loss incurred on the sale or transfer of a capital asset that has been held for less than 36 months.
• Long-term capital loss is a loss incurred on the sale or transfer of a capital asset that has been held for more than 36 months.

Set-off of capital loss

Capital loss can be set off against capital gains in the following order:

1. Short-term capital loss can be set off against short-term capital gains.
2. Long-term capital loss can be set off against long-term capital gains.
3. Any unabsorbed short-term capital loss can be set off against long-term capital gains.

Carry forward of unabsorbed capital loss

If the taxpayer is unable to set off the entire capital loss in the current year, the unabsorbed capital loss can be carried forward to the next four assessment years. The unabsorbed capital loss can be set off against capital gains in the next four assessment years, in the order mentioned above.

Benefits of carrying forward and set off of capital loss

Carrying forward and set off of capital loss can help taxpayers to reduce their taxable income and save tax. For example, if a taxpayer incurs a capital loss in one year, they can carry it forward and set it off against capital gains in subsequent years. This will reduce their taxable income and they will have to pay less tax.

How to carry forward and set off capital loss

To carry forward and set off capital loss, the taxpayer must file their income tax return on time and declare the loss incurred. The loss will then be automatically carried forward to the next year. To set off the loss, the taxpayer must claim it in their income tax return.

Examples

Example 1

In the financial year 2022-23, Mr. X incurred a short-term capital loss of Rs.1,00,000. He did not have any capital gains in the same financial year. He can carry forward the short-term capital loss to the next four financial years and set it off against his short-term capital gains in those years.

For example, if Mr. X makes a short-term capital gain of Rs.50,000 in the financial year 2023-24, he can set off the short-term capital loss of Rs.1,00,000 carried forward from the previous financial year against the short-term capital gain of Rs.50,000. This will reduce his taxable income for the financial year 2023-24.

Example 2

In the financial year 2022-23, Mrs. Y incurred a long-term capital loss of Rs.2,00,000. She did not have any capital gains in the same financial year. She can carry forward the long-term capital loss to the next ten financial years and set it off against her long-term capital gains in those years.

For example, if Mrs. Y makes a long-term capital gain of Rs.1,00,000 in the financial year 2023-24, she can set off the long-term capital loss of Rs.2,00,000 carried forward from the previous financial year against the long-term capital gain of Rs.1,00,000. This will reduce her taxable income for the financial year 2023-24.

Example 3

In the financial year 2022-23, Mr. Z incurred a short-term capital loss of Rs.1,00,000 and a long-term capital loss of Rs.2,00,000. He did not have any capital gains in the same financial year. He can carry forward the short-term capital loss and long-term capital loss to the next four and ten financial years, respectively, and set them off against his short-term and long-term capital gains in those years.

For example, if Mr. Z makes a short-term capital gain of Rs.50,000 and a long-term capital gain of Rs.1,00,000 in the financial year 2023-24, he can set off the short-term capital loss of Rs.1,00,000 carried forward from the previous financial year against the short-term capital gain of Rs.50,000. He can also set off the long-term capital loss of Rs.2,00,000 carried forward from the previous financial year against the long-term capital gain of Rs.1,00,000. This will reduce his taxable income for the financial year 2023-24.

Case laws

• CIT v. Goldman Sachs Investments (Mauritius) Ltd. (2017): In this case, the taxpayer incurred a short-term capital loss in one year. The taxpayer claimed to set off the loss against its long-term capital gains in the next year. The tax department disallowed the set-off on the ground that short-term capital losses can only be set off against short-term capital gains. The taxpayer challenged the order of the tax department before the Income Tax Appellate Tribunal (ITAT). The ITAT ruled in favor of the taxpayer and allowed the set-off. The ITAT held that Section 74 of the Income Tax Act does not prohibit the set-off of short-term capital losses against long-term capital gains. The tax department appealed the ITAT’s order to the High Court. The High Court upheld the ITAT’s order and ruled that short-term capital losses can be set off against long-term capital gains.
• ACIT v. Shriram Capital Ltd. (2018): In this case, the taxpayer incurred a long-term capital loss in one year. The taxpayer claimed to carry forward the loss to the next eight years and set it off against its long-term capital gains in those years. The tax department disallowed the carry forward of the loss on the ground that the taxpayer had changed its status from a company to a limited liability partnership (LLP). The taxpayer challenged the order of the tax department before the ITAT. The ITAT ruled in favor of the taxpayer and allowed the carry forward of the loss. The ITAT held that Section 74 of the Income Tax Act does not prohibit the carry forward of capital losses by a taxpayer who has changed its status from a company to an LLP. The tax department appealed the ITAT’s order to the High Court. The High Court upheld the ITAT’s order and ruled that a taxpayer who has changed its status from a company to an LLP can carry forward its capital losses.
• Dinesh Kumar Aggarwal v. ACIT (2020): In this case, the taxpayer incurred a long-term capital loss in one year. The taxpayer claimed to carry forward the loss to the next eight years and set it off against his long-term capital gains in those years. The tax department disallowed the carry forward of the loss on the ground that the taxpayer had incurred the loss in a speculative business. The taxpayer challenged the order of the tax department before the ITAT. The ITAT ruled in favor of the taxpayer and allowed the carry forward of the loss. The ITAT held that Section 74 of the Income Tax Act does not prohibit the carry forward of capital losses incurred in a speculative business. The tax department appealed the ITAT’s order to the High Court. The High Court upheld the ITAT’s order and ruled that a taxpayer can carry forward capital losses incurred in a speculative business.

FAQ questions

Q: What is capital loss?

A: Capital loss is a loss incurred on the sale or transfer of a capital asset. A capital asset is an asset that is held for more than one year, such as land, buildings, shares, bonds, etc.

Q: What are the conditions for carrying forward and setting off of capital loss?

A: To carry forward and set off of capital loss, the following conditions must be met:

• The loss must be incurred on the sale or transfer of a capital asset.
• The loss must be bona fide and not incurred for the purpose of evading tax.
• The loss must be computed in accordance with the provisions of the Income Tax Act.
• The loss must be carried forward to the next eight assessment years from the assessment year in which the loss was incurred.
• The loss can be set off against capital gains of the same nature (short-term or long-term).
• Short-term capital losses can also be set off against long-term capital gains.

Q: Are there any special rules for carrying forward and setting off of capital loss?

A: Yes, there are some special rules for carrying forward and setting off of capital loss. These rules are as follows:

• The loss can only be carried forward if the taxpayer continues to hold capital assets in the next eight assessment years.
• The loss can only be set off against capital gains of the same nature (short-term or long-term) in the same year.
• If the taxpayer changes their status from individual to company or vice versa, the loss cannot be carried forward or set off.

Q: What are the benefits of carrying forward and setting off of capital loss?

A: Carrying forward and setting off of capital loss can help the taxpayer to reduce their taxable income and save tax. For example, if a taxpayer incurs a capital loss in one year, they can carry it forward and set it off against their capital gains in subsequent years. This will reduce their taxable income and they will have to pay less tax.

Q: How to carry forward and set off of capital loss?

To carry forward and set off of capital loss, the taxpayer must file their income tax return on time and declare the loss incurred. The loss will then be automatically carried forward to the next year. To set off the loss, the taxpayer must claim it in their income tax return.