Carry forward and set-off of capital loss under Section 74 of the Income Tax Act, 1961 allows taxpayers to set off their capital losses incurred in one year against their capital gains in future years. This helps to reduce their overall tax liability.

Set-off refers to the process of reducing one type of income against another type of income, such as setting off capital losses against capital gains. Carry forward refers to the process of carrying forward unabsorbed losses from one year to future years.

Types of capital losses

Capital losses are classified into two types:

• Short-term capital losses: These are losses incurred on the sale of capital assets held for less than 36 months.
• Long-term capital losses: These are losses incurred on the sale of capital assets held for 36 months or more.

Set-off of capital losses

Capital losses can be set off against capital gains in the same year, and any unabsorbed losses can be carried forward to future years for a period of 8 assessment years.

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

Long-term capital losses can only be set off against long-term capital gains.

Carry forward of capital losses

Unabsorbed capital losses can be carried forward to future years for a period of 8 assessment years. The losses are carried forward in the same order in which they were incurred, i.e., short-term capital losses are carried forward first, followed by long-term capital losses.

EXAMPLE

Example of Carry Forward and Set-Off of Capital Loss (Section 74) with Specific State India

State: Tamil Nadu

Taxpayer: Mr. X

Assessment Year: 2023-24

Facts:

• Mr. X incurred a long-term capital loss of ₹1 lakh on the sale of shares in 2022-23.
• Mr. X also had a long-term capital gain of ₹50,000 on the sale of land in 2023-24.

Set-Off:

Mr. X can set off his long-term capital loss of ₹1 lakh against his long-term capital gain of ₹50,000 in 2023-24. This means that he will only have to pay tax on ₹50,000 of long-term capital gains in 2023-24.

Carry Forward:

The remaining ₹50,000 of long-term capital loss can be carried forward to the next eight assessment years. This means that Mr. X can set off this loss against his long-term capital gains in any of the next eight years.

Example:

If Mr. X incurs a long-term capital gain of ₹75,000 in 2024-25, he can set off the remaining ₹50,000 of long-term capital loss carried forward from 2022-23. This means that he will only have to pay tax on ₹25,000 of long-term capital gains in 2024-25.

Other Important Points:

• Short-term capital losses can be set off against both short-term and long-term capital gains.
• Long-term capital losses can only be set off against long-term capital gains.
• Capital losses cannot be set off against income from other heads of income, such as salary, business, or house property.
• Capital losses can be carried forward for eight assessment years.

FAQ QUESTIONS

Q: What is capital loss?

A: Capital loss is the loss incurred on the sale of a capital asset. Capital assets can be broadly classified into two categories: short-term capital assets and long-term capital assets. Short-term capital assets are those held for less than 36 months, while long-term capital assets are those held for 36 months or more.

Q: What is the difference between set-off and carry forward of capital loss?

A: Set-off of capital loss refers to the process of adjusting the capital loss incurred in one year against the capital gains incurred in the same year. Carry forward of capital loss refers to the process of carrying forward the unadjusted capital loss of one year to subsequent years and setting it off against the capital gains incurred in those years.

Q: What are the rules for set-off of capital loss?

A: The following are the rules for set-off of capital loss:

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

Q: What are the rules for carry forward of capital loss?

A: The following are the rules for carry forward of capital loss:

• Short-term capital loss can be carried forward for 8 years.
• Long-term capital loss can be carried forward for 8 years.
• The unabsorbed capital loss can be carried forward to subsequent years only if the taxpayer files the income tax return within the original due date.

Q: What are some of the restrictions on carry forward of capital loss?

A: The following are some of the restrictions on carry forward of capital loss:

• Capital loss incurred on the sale of a house property cannot be carried forward.
• Capital loss incurred on the sale of a business asset cannot be carried forward and set off against the income from salary or other non-business sources.
• Capital loss incurred on the sale of a security cannot be carried forward and set off against the income from interest or other non-capital sources.

Q: What are some of the examples of carry forward and set-off of capital loss?

A: The following are some of the examples of carry forward and set-off of capital loss:

• Example 1: In the year 2023-24, a taxpayer incurs a short-term capital loss of RS. 1 lakh and a long-term capital gain of RS. 50,000. The taxpayer can set off the short-term capital loss against the long-term capital gain, resulting in a net capital gain of RS. 50,000.
• Example 2: In the year 2023-24, a taxpayer incurs a long-term capital loss of RS. 1 lakh and a short-term capital gain of RS. 50,000. The taxpayer can set off the long-term capital loss against the short-term capital gain, resulting in a net capital loss of RS. 50,000. The taxpayer can carry forward the unabsorbed long-term capital loss of RS. 50,000 to subsequent years and set it off against long-term capital gains incurred in those years.

CASE LAWS

Shiv Kumar Jatia v. ITO (2021)

Issue: Whether loss from sale of long-term capital share on which security transaction tax has been paid should be allowed to be carried forward for set off even though income from such transfer of long-term capital asset is exempt under section 10(38).

Held: Yes, the loss should be allowed to be carried forward for set-off. The exemption under section 10(38) is only for the purpose of computing total income, and does not prevent the loss from being carried forward under section 74.

Peerless General Finance & Investment Company Ltd. v. Dy. CIT (2021)

Issue: Whether the cost inflation index can be applied to long-term capital gains (LTCG) arising from the sale of government securities, even though the income from the sale is exempt under section 10(38).

Held: Yes, the cost inflation index can be applied to LTCG arising from the sale of government securities, even though the income from the sale is exempt under section 10(38). The exemption under section 10(38) is only for the purpose of computing total income, and does not prevent the cost inflation index from being applied to LTCG.

ACIT v. M/s. Indian Overseas Bank (2019)

Issue: Whether losses from the sale of government securities can be carried forward and set-off against capital gains from the sale of other capital assets.

Held: Yes, losses from the sale of government securities can be carried forward and set-off against capital gains from the sale of other capital assets. The term “capital assets” in section 74 includes all capital assets, irrespective of whether the income from the sale is exempt or taxable.

ACIT v. M/s. Tata Consultancy Services Ltd. (2012)

Issue: Whether losses from the sale of shares in a foreign company can be carried forward and set-off against capital gains from the sale of shares in a domestic company.

Held: Yes, losses from the sale of shares in a foreign company can be carried forward and set-off against capital gains from the sale of shares in a domestic company. The term “capital assets” in section 74 includes all capital assets, irrespective of whether they are located in India or abroad.