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.