5 rules to follow for setting off losses against gains
A taxpayer must follow 5 basic rules while adjusting capital losses against capital gains. The five rules are as follows:
a) Loss from exempt source must be set off only against exempt income.
b) There is intra-head adjustment and inter-head adjustment among different heads of income. Intra-head adjustment must be done first, and then the inter-head adjustment. Intra-head adjustment means that if the taxpayer has incurred loss from one source under a particular head, she is allowed to set it off against income from another source under the same head. For e.g., if you have 3 house properties and one of them makes loss, then this loss can be set off against income from other 2 house properties (such as rental income). Inter head adjustment is about setting off of losses from one head of income (e.g., business income) against another head of income (e.g., capital gains).
c) Unabsorbed depreciation in business and profession is completely different from business loss or any other loss.
d) Loss from speculation business (e.g., intra-day trading in shares) cannot be set off against any income other than speculation income,
e) No loss can be set off against income from lottery winnings, race including horse race, card game, and any other game, gambling, crypto income etc.
Types of losses faced by taxpayers
Usually, an individual taxpayer faces two kinds of losses in computation of his/her income. One is house property loss, and the other is capital loss from sale of asset. The loss from house property can be set off against any other head up to Rs 2 lakh. The remaining loss can be carried forward till the next 8 years to be set off against income from house property only in the future years.
However, the rules regarding capital loss are not that straight. The loss under this head cannot be set off against income from any head (such as salary, other sources etc.) other than the income from capital gains. Depending upon the duration of holding period of the asset, the capital gains can be of two kinds- long term capital gains (LTCG) and short-term capital gains (STCG). The long-term capital loss must be set off only against income from long-term capital gains. However, short-term capital loss can be set off against income from long-term capital gains as well as short-term capital gains. In a nutshell, long absorbs the short.
It is possible that the entire amount of capital loss may not be absorbed for setting off in a year of incurring loss. This happens when the amount of loss exceeds the gains. In that case, such loss is allowed to be carried forward to the next 8 assessment years. However, the carried forward loss can be adjusted only against income from capital gains.
Things to keep in mind while claiming set-off
It is very important to keep in mind 3 things while claiming set off from carried forward losses. One, the year in which such loss is incurred must be re-verified to see whether it is within limits of 8 years from the base year of incurring loss. Two, whether the amount of loss has been reduced in assessments in any of the years and if such adjustment has reached finality. And three, whether the return of the base year was filed within the due date of filing ITR for a particular class of tax – payers.
In case, you were subjected to income tax enquiries like search and survey and as a result of that your undisclosed income is detected, then no loss of any kind can be set off against such undisclosed income.
How to claim set-off in ITR form
One is required to report such gains and losses in the ITR and claim the set off. This is to be reported in the Schedule – CG of the ITR form.
Once you know the sources of various income, you will have to select the proper ITR form applicable. An individual is required to feed the information in the columns relevant to capital gains/loss for computation. The details that you need to enter are the full value of consideration (sales price), date of sale, cost of acquisition and date of acquisition and any other relevant details/expenses, as applicable.
If you are claiming deduction (e.g., deductions under section 54) against capital gains, then you are required to enter the relevant details as well. It is important to feed the correct details and then re-verify and confirm such details before submitting the ITR. It is advisable to compute the income and losses in rough working before feeding the information in the ITR forms.
(The writer is Ex-IRS officer & Founder, Taxbuddy.com)