Income Tax 2025

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Carry forward and set off of loss from Capital gains. ​

111(1) ​

The unabsorbed capital loss for any tax year shall be carried forward to the subsequent tax year and shall be set off in the manner provided in sub-section (2).

111(2) ​

The unabsorbed capital loss arising from transfer of capital asset, being–– (a) a long-term capital asset, may be set off only against capital gains, if any, from transfer of any other long-term capital asset during the subsequent tax year and so on; and (b) a short-term capital asset, shall be set off against capital gains, if any, from transfer of any other capital asset during the subsequent tax year and so on.

111(3) ​

The unabsorbed capital loss referred to in sub-section (1), shall be carried forward to the following tax year, not being more than eight tax years immediately succeeding the tax year in which such loss was first computed.

111(4) ​

In this section, “unabsorbed capital loss” means loss computed under the head “Capital gains” for any tax year, which has not been, or is not wholly, set off under section 108 for the said tax year.

Explanation

Section Summary: ​

This section of the income tax law deals with the carry forward and set-off of capital losses that remain unabsorbed in a tax year. It specifies how taxpayers can carry forward these losses to future tax years and set them off against capital gains in subsequent years. The section differentiates between losses from long-term capital assets and short-term capital assets and sets a time limit for carrying forward such losses.

Key Changes: ​

  1. Clarification on Set-Off Rules: The section explicitly states that:
    • Long-term capital losses can only be set off against long-term capital gains.
    • Short-term capital losses can be set off against both short-term and long-term capital gains.
  2. Time Limit for Carry Forward: Unabsorbed capital losses can now be carried forward for a maximum of 8 tax years from the year the loss was first computed. This is a clear limitation compared to previous provisions, which may have had different interpretations.

Practical Implications: ​

  1. For Taxpayers:
    • Taxpayers with capital losses can reduce their tax liability in future years by setting off these losses against capital gains.
    • Long-term capital losses are restricted to being set off only against long-term capital gains, which may limit their utility compared to short-term capital losses.
  2. For Businesses:
    • Businesses with capital assets (e.g., shares, property) need to track capital losses carefully to ensure they are utilized within the 8-year window.
  3. Compliance:
    • Taxpayers must maintain accurate records of capital losses and ensure they are reported correctly in their tax returns to claim carry-forward benefits.

Critical Concepts: ​

  1. Unabsorbed Capital Loss: This refers to the portion of capital loss that could not be set off against capital gains in the same tax year. It is computed under the "Capital gains" head.
  2. Long-Term vs. Short-Term Capital Assets:
    • Long-Term Capital Asset: An asset held for more than 36 months (or 12/24 months for certain assets like listed shares, mutual funds, etc.).
    • Short-Term Capital Asset: An asset held for 36 months or less (or 12/24 months for certain assets).
  3. Set-Off Rules:
    • Long-term capital losses can only offset long-term capital gains.
    • Short-term capital losses can offset both short-term and long-term capital gains.

Compliance Steps: ​

  1. Documentation:
    • Maintain records of capital losses, including the year they were incurred and the type of asset (long-term or short-term).
  2. Reporting:
    • Report capital losses in the tax return for the year they are incurred to ensure they are eligible for carry-forward.
  3. Tracking:
    • Track the 8-year window for carrying forward losses to avoid losing the benefit.

Examples: ​

  1. Long-Term Capital Loss:

    • In 2023-24, Mr. A sells a property (long-term capital asset) and incurs a loss of ₹5 lakh. He has no other capital gains in 2023-24.
    • In 2024-25, he sells another property and earns a long-term capital gain of ₹6 lakh.
    • He can set off the ₹5 lakh loss from 2023-24 against the ₹6 lakh gain in 2024-25, reducing his taxable capital gain to ₹1 lakh.

  2. Short-Term Capital Loss:

    • In 2023-24, Ms. B sells shares (short-term capital asset) and incurs a loss of ₹2 lakh. She has no other capital gains in 2023-24.
    • In 2024-25, she sells another asset and earns a long-term capital gain of ₹3 lakh.
    • She can set off the ₹2 lakh short-term capital loss against the ₹3 lakh long-term capital gain, reducing her taxable capital gain to ₹1 lakh.

This section ensures that taxpayers can effectively manage their capital losses while adhering to specific rules and time limits. Proper documentation and timely reporting are crucial to maximize the benefits.