No one likes making losses on their investments. It defeats the whole purpose of investing to earn a return. But there are circumstances when asset classes like stock market, property market or gold can misbehave, forcing you to incur losses.
But such situations can be a boon from the income tax perspective. Losses incurred on the sale of any capital asset, broadly listed equity shares, equity mutual funds, property or gold can be set off against gains incurred on the sale of similar assets to claim tax exemption. Let us see how.
Say, you purchased a house for Rs 1 crore less than two years ago. You are paying interest to the tune of about Rs 10 lakh per year, but the rental income from the property is only about Rs 2.5 lakh per year. Now you want to reduce your loss by selling the property. However, due to the slump in the real estate market, you are not getting more than Rs 1 crore for the property. But the indexation cost of the property has increased to Rs 1.3 crore. So, if you sell the property for Rs 1 crore, you technically incur a loss of Rs 30 lakh. You can set off this loss against any gains you make by selling either shares (which is possible considering the current bull run in the stock market) or other property.
Similarly, assume that a particular company’s shares in your portfolio have declined by 30% in a year. You can sell that company’s shares, book a loss and use the loss to set off gains incurred while selling other shares of other companies.
“Individuals can claim exemption in all transactions where the gains are not exempt from tax. This includes gains from the sale of equity shares if sold in less than a year or property if it is sold in less than two years. Similarly, losses incurred from the sale of equity oriented mutual funds are also eligible for the exemption if they are held for less than one year,” says Vaibhav Sankla, director, H&R Block.
Equity shares where one has incurred the long-term capital loss, that is, if they are held for more than one year, are not eligible for tax exemption because these are not subject to tax in case of gains, he adds.
“Capital gains do not generally arise on a regular basis. They arise only when you sell shares or property, etc. That is why capital gains cannot be adjusted against any income, but only against capital gains,” says Naveen Wadhwa, general manager, Taxmann.com.
Short-term capital losses can be adjusted against short-term and long-term capital gains, but long-term capital losses can be adjusted only against long-term capital gains. For equity and equity oriented investments, long term is more than one year, while for property long term is two years, if the property is purchased after April 2017.
In case of property purchased prior to April, the holding period is three years.
Sale of unlisted shares, debt mutual funds, gold deposit bonds, special bearer bonds, gold deposit certificates and listed shares (held for more than one year), if sold through an off-market transaction, are also eligible for exemption in case of loss. Even losses from overseas transactions, be it property or shares, will qualify for set off against capital gains in India. “The logic is that long-term capital gains are taxable at 10% or 20%. So they are not allowed to be set off against short-term capital gains which are taxed at 30%,’’ says Wadhwa.
You can even carry forward the loss, both short-term and long-term, and use it to set off gains incurred in future. It is possible to carry forward the losses for eight years. But provided you file your tax returns within the due date.
“It is important to file returns within the due date because only then you can carry forward the loss and set it off against losses arising in any year. In between, if you miss filing the return before the due date in any year, then too you may miss out on the chance to set off the loss,” says Archit Gupta, founder and CEO, ClearTax.
While filing returns if you have any kind of capital gains, you have to file ITR-2 if you are salaried or ITR-3 if you have business income.