This has been a disappointing year for domestic equity markets with the Nifty declining at least 20% year-to-date. Investors are likely to have both unrealized and realized loss in their portfolios. Realized capital loss arises when you sell a stock or mutual fund (MF) at a price lower than your purchase price; hence, you book loss. While this isn’t anything you can rejoice about, you can set off or deduct capital loss from capital gain in the same year. This, in turn, means your tax liability stands reduced as the net capital gain reduces.
What is a capital asset?
Capital asset means property of any kind (the Income-tax Act clearly identifies exceptions). The Act doesn’t define “property” as such. Judicially, property is a bundle of rights which the owner can lawfully exercise to the exclusion of all others and is entitled to use and enjoy as he pleases, provided he does not infringe any law. Once something is identified as property, it is a capital asset unless specifically exempted under the Act or if it figures in the exceptions mentioned in the Act.
What is short-term and long-term capital asset?
A short-term capital asset is that which is held for 36 months or less and long-term capital asset is one held for more than 36 months. In case of shares, any specified MF unit or units of Unit Trust of India or any security listed on a recognized stock exchange, short-term capital assets are those held for less than a year and long-term capital assets are those held for more than a year.
How can the loss be set off?
Realized short-term capital loss (asset held for less than a year in case of MF units and shares and less than 36 months for other capital assets) can be set off against gain from transfer of any other long-or short-term capital asset. Additionally, loss from transfer of a long-term capital asset (held for more than a year in case of MF units and shares and more than 36 months for other capital assets) can be set off against gains from transfer of long-term capital asset in the same year. This means if you have booked a loss of Rs 100 in a short-term capital asset and you have booked a gain of Rs 200 in a long-term capital asset, your net long-term capital gain on which you will be taxed is Rs 100. Similarly, if you booked a loss of Rs 200 in a long-term capital asset and booked a gain of Rs 100 in a short-term capital asset and Rs 200 in a long-term capital asset, your capital gains tax will be calculated for the gain of Rs 100 in the short-term capital asset. Note that long-term capital loss can only be set off against long-term capital gain from any capital asset and not against short-term capital gain.
Capital loss computed in an assessment year (AY) can be carried forward for eight AYs if it isn’t utilized fully in a given year. So if you booked a capital loss in the AY 2010-11 but didn’t earn any capital gains in that year, the loss can be set off against any other capital gain in the same AY or carried forward till AY 2018-19. Also, capital loss can’t be set off against any other income.
My Add-on:
Investors can also use Section 94 (8) on the Income Tax Act to their advantage, this sections states the treatment of Tax regarding Dividend and Bonus. For the purpose of explanation section 94 is mentioned below:
--- ITA - Income Tax Act ---
SECTION 94: Avoidance of tax by certain transactions in securities
Avoidance of tax by certain transactions in securities.
3 94. (1) Where the owner of any securities (in this sub-section and in sub-section (2) referred to as "the owner") sells or transfers those securities, and buys back or reacquires the securities, then, if the result of the transaction is that any interest becoming payable in respect of the securities is receivable otherwise than by the owner, the interest payable as aforesaid shall, whether it would or would not have been chargeable to income-tax apart from the provisions of this sub-section, be deemed, for all the purposes of this Act, to be the income of the owner and not to be the income of any other person.
Explanation.—The references in this sub-section to buying back or reacquiring the securities shall be deemed to include references to buying or acquiring similar securities, so, however, that where similar securities are bought or acquired, the owner shall be under no greater liability to income-tax than he would have been under if the original securities had been bought back or reacquired.
(2) Where any person has had at any time during any previous year any beneficial interest in any securities, and the result of any transaction relating to such securities or the income thereof is that, in respect of such securities within such year, either no income is received by him or the income received by him is less than the sum to which the income would have amounted if the income from such securities had accrued from day to day and been apportioned accordingly, then the income from such securities for such year shall be deemed to be the income of such person.
(3) The provisions of sub-section (1) or sub-section (2) shall not apply if the owner, or the person who has had a beneficial interest in the securities, as the case may be, proves to the satisfaction of the 4 [Assessing] Officer—
(a ) that there has been no avoidance of income-tax, or
(b ) that the avoidance of income-tax was exceptional and not systematic and that there was not in his case in any of the three preceding years any avoidance of income-tax by a transaction of the nature referred to in sub-section (1) or sub-section (2).
(4) Where any person carrying on a business which consists wholly or partly in dealing in securities, buys or acquires any securities and sells back or retransfers the securities, then, if the result of the transaction is that interest becoming payable in respect of the securities is receivable by him but is not deemed to be his income by reason of the provisions contained in sub-section (1), no account shall be taken of the transaction in computing for any of the purposes of this Act the profits arising from or loss sustained in the business.
(5) Sub-section (4) shall have effect, subject to any necessary modifications, as if references to selling back or retransferring the securities included references to selling or transferring similar securities.
(6) The 5[Assessing] Officer may, by notice in writing, require any person to furnish him within such time as he may direct (not being less than twenty-eight days), in respect of all securities of which such person was the owner or in which he had a beneficial interest at any time during the period specified in the notice, such particulars as he considers necessary for the purposes of this section and for the purpose of discovering whether income-tax has been borne in respect of the interest on all those securities.
6 [(7) Where—
( a) any person buys or acquires any securities or unit within a period of three months prior to the record date;
7[( b) such person sells or transfers—
(i) such securities within a period of three months after such date; or
(ii) such unit within a period of nine months after such date;]
(c ) the dividend or income on such securities or unit received or receivable by such person is exempt,
then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax.]
8 [(8) Where—
(a ) any person buys or acquires any units within a period of three months prior to the record date;
(b ) such person is allotted additional units without any payment on the basis of holding of such units on such date;
(c ) such person sells or transfers all or any of the units referred to in clause (a) within a period of nine months after such date, while continuing to hold all or any of the additional units referred to in clause (b),
then, the loss, if any, arising to him on account of such purchase and sale of all or any of such units shall be ignored for the purposes of computing his income chargeable to tax and notwithstanding anything contained in any other provision of this Act, the amount of loss so ignored shall be deemed to be the cost of purchase or acquisition of such additional units referred to in clause (b) as are held by him on the date of such sale or transfer.]
Explanation.—For the purposes of this section,—
(a ) "interest" includes a dividend ;
9[( aa) "record date" means such date as may be fixed by—
(i) a company for the purposes of entitlement of the holder of the securities to receive dividend; or
(ii) a Mutual Fund or the Administrator of the specified undertaking or the specified company as referred to in the Explanation to clause (35) of section 10 , for the purposes of entitlement of the holder of the units to receive income, or additional unit without any consideration, as the case may be;]
(b ) "securities" includes stocks and shares ;
(c ) securities shall be deemed to be similar if they entitle their holders to the same rights against the same persons as to capital and interest and the same remedies for the enforcement of those rights, notwithstanding any difference in the total nominal amounts of the respective securities or in the form in which they are held or in the manner in which they can be transferred;
10[( d) "unit" shall have the meaning assigned to it in clause (b) of the Explanation to section 115AB .]
3 94. (1) Where the owner of any securities (in this sub-section and in sub-section (2) referred to as "the owner") sells or transfers those securities, and buys back or reacquires the securities, then, if the result of the transaction is that any interest becoming payable in respect of the securities is receivable otherwise than by the owner, the interest payable as aforesaid shall, whether it would or would not have been chargeable to income-tax apart from the provisions of this sub-section, be deemed, for all the purposes of this Act, to be the income of the owner and not to be the income of any other person.
Explanation.—The references in this sub-section to buying back or reacquiring the securities shall be deemed to include references to buying or acquiring similar securities, so, however, that where similar securities are bought or acquired, the owner shall be under no greater liability to income-tax than he would have been under if the original securities had been bought back or reacquired.
(2) Where any person has had at any time during any previous year any beneficial interest in any securities, and the result of any transaction relating to such securities or the income thereof is that, in respect of such securities within such year, either no income is received by him or the income received by him is less than the sum to which the income would have amounted if the income from such securities had accrued from day to day and been apportioned accordingly, then the income from such securities for such year shall be deemed to be the income of such person.
(3) The provisions of sub-section (1) or sub-section (2) shall not apply if the owner, or the person who has had a beneficial interest in the securities, as the case may be, proves to the satisfaction of the 4 [Assessing] Officer—
(a ) that there has been no avoidance of income-tax, or
(b ) that the avoidance of income-tax was exceptional and not systematic and that there was not in his case in any of the three preceding years any avoidance of income-tax by a transaction of the nature referred to in sub-section (1) or sub-section (2).
(4) Where any person carrying on a business which consists wholly or partly in dealing in securities, buys or acquires any securities and sells back or retransfers the securities, then, if the result of the transaction is that interest becoming payable in respect of the securities is receivable by him but is not deemed to be his income by reason of the provisions contained in sub-section (1), no account shall be taken of the transaction in computing for any of the purposes of this Act the profits arising from or loss sustained in the business.
(5) Sub-section (4) shall have effect, subject to any necessary modifications, as if references to selling back or retransferring the securities included references to selling or transferring similar securities.
(6) The 5[Assessing] Officer may, by notice in writing, require any person to furnish him within such time as he may direct (not being less than twenty-eight days), in respect of all securities of which such person was the owner or in which he had a beneficial interest at any time during the period specified in the notice, such particulars as he considers necessary for the purposes of this section and for the purpose of discovering whether income-tax has been borne in respect of the interest on all those securities.
6 [(7) Where—
( a) any person buys or acquires any securities or unit within a period of three months prior to the record date;
7[( b) such person sells or transfers—
(i) such securities within a period of three months after such date; or
(ii) such unit within a period of nine months after such date;]
(c ) the dividend or income on such securities or unit received or receivable by such person is exempt,
then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax.]
8 [(8) Where—
(a ) any person buys or acquires any units within a period of three months prior to the record date;
(b ) such person is allotted additional units without any payment on the basis of holding of such units on such date;
(c ) such person sells or transfers all or any of the units referred to in clause (a) within a period of nine months after such date, while continuing to hold all or any of the additional units referred to in clause (b),
then, the loss, if any, arising to him on account of such purchase and sale of all or any of such units shall be ignored for the purposes of computing his income chargeable to tax and notwithstanding anything contained in any other provision of this Act, the amount of loss so ignored shall be deemed to be the cost of purchase or acquisition of such additional units referred to in clause (b) as are held by him on the date of such sale or transfer.]
Explanation.—For the purposes of this section,—
(a ) "interest" includes a dividend ;
9[( aa) "record date" means such date as may be fixed by—
(i) a company for the purposes of entitlement of the holder of the securities to receive dividend; or
(ii) a Mutual Fund or the Administrator of the specified undertaking or the specified company as referred to in the Explanation to clause (35) of section 10 , for the purposes of entitlement of the holder of the units to receive income, or additional unit without any consideration, as the case may be;]
(b ) "securities" includes stocks and shares ;
(c ) securities shall be deemed to be similar if they entitle their holders to the same rights against the same persons as to capital and interest and the same remedies for the enforcement of those rights, notwithstanding any difference in the total nominal amounts of the respective securities or in the form in which they are held or in the manner in which they can be transferred;
10[( d) "unit" shall have the meaning assigned to it in clause (b) of the Explanation to section 115AB .]
3. For relevant case laws, see Google.com.
4. Substituted for "Income-tax" by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1988.
5. Substituted for "Income-tax" by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1988.
6. Inserted by the Finance Act, 2001, w.e.f. 1-4-2002.
7. Substituted by the Finance (No. 2) Act, 2004, w.e.f. 1-4-2005. Prior to its substitution, clause (b ) read as under :
"(b) such person sells or transfers such securities or unit within a period of three months after such date;"
8. Inserted by the Finance (No. 2) Act, 2004, w.e.f. 1-4-2005.
9. Substituted by the Finance (No. 2) Act, 2004, w.e.f. 1-4-2005. Prior to its substitution, clause (aa ), as inserted by the Finance Act, 2001, w.e.f. 1-4-2002, read as under :
‘(aa) "record date" means such date as may be fixed by a company or a Mutual Fund or the Unit Trust of India for the purposes of entitlement of the holder of the securities or the unit-holder, to receive dividend or income, as the case may be;’
10. Inserted by the Finance Act, 2001, w.e.f. 1-4-2002.
4. Substituted for "Income-tax" by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1988.
5. Substituted for "Income-tax" by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1988.
6. Inserted by the Finance Act, 2001, w.e.f. 1-4-2002.
7. Substituted by the Finance (No. 2) Act, 2004, w.e.f. 1-4-2005. Prior to its substitution, clause (b ) read as under :
"(b) such person sells or transfers such securities or unit within a period of three months after such date;"
8. Inserted by the Finance (No. 2) Act, 2004, w.e.f. 1-4-2005.
9. Substituted by the Finance (No. 2) Act, 2004, w.e.f. 1-4-2005. Prior to its substitution, clause (aa ), as inserted by the Finance Act, 2001, w.e.f. 1-4-2002, read as under :
‘(aa) "record date" means such date as may be fixed by a company or a Mutual Fund or the Unit Trust of India for the purposes of entitlement of the holder of the securities or the unit-holder, to receive dividend or income, as the case may be;’
10. Inserted by the Finance Act, 2001, w.e.f. 1-4-2002.
Location in ITA: CPC\Chapter X\Section 94
Location in App: ITA\Chapter X\Section 94
Location in App: ITA\Chapter X\Section 94
-Shared from 'ITA - Income Tax Act'
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