Income Tax Return (ITR) filing: Availed loss on selling equities, mutual funds? Here’s how you can set them off in your tax return

There is an immense joy when your pocket is filled with hefty gains from investments in stocks. A point to note is that equities and mutual funds so far have fetched much greater and higher returns than compared to any other investment. Every day is not a positive one as far as equities and mutual funds investors are concerned. Chances of capital losses very much exist. That said, if you have witnessed any losses in your equities or mutual funds, then long term capital loss arising from transfer made on or after 1st April, 2018 will be allowed to be set-off and carried forward in accordance with existing provisions of the Act.

Archit Gupta, Founder & CEO ClearTax says, “Set off’ means you can adjust the loss against income, and ‘carry forward’ means that whatever is unadjusted you can take it to future years and set it off from them. Capital loss arises on the sale of capital assets such as equity shares, equity-oriented mutual funds, immovable property, debt funds etc." 

Here’s an example given by Gupta on understanding the computation of capital loss in the case of equity shares held for more than one year and sold in FY 2018-19.

Sale  value: Rs 30,000. Cost of acquisition: Rs 50,000. Fair market value (FMV) on 31 January 2018: Rs 60,000. In this example, the sale price is lower than the FMV, hence the higher of the sale price and the purchase price is taken as the cost. The capital loss  is Rs 30,000 - Rs 50,000 = Rs 20,000.

How to set off capital losses?

In  the above example, Gupta explains that, Rs 20,000 is the long term capital loss for FY 2018-19. Losses under 'long term capital loss’ can be set off against long term capital gains. The loss calculated above can be set off against any other long term capital gains e.g., long term gains on the sale of debt mutual funds. And, 'short term capital loss' can be set off against both long term capital gain and short term capital gain.

Notably, assets  such as equity and equity-oriented mutual fund qualify as short-term assets for a period of holding of one year or less. For unlisted shares and immovable property, the holding period is two years or less. In case of debt mutual funds and immovable property,  the holding period is 3 years or less in order to qualify as a short-term capital asset.

In  the case of assets other than equity shares, equity-oriented mutual funds and units of a business trust, the purchase cost becomes the cost for a taxpayer. In case the capital asset becomes a long-term capital asset, the cost can be adjusted using the cost inflation index under the income tax law.

“A taxpayer may also have brought forward capital losses. In case of capital losses brought forward from previous assessment years, a taxpayer can set off capital gains earned in the current year against such losses. The rules mentioned above for set off of long term capital loss and short term capital loss with apply even in case of set off of brought forward losses. Any losses that remain after such set-off can be continued to be carried forward up to a maximum of 8 assessment years,” Gupta said.

Procedure for set off and carry forward:

According to Gupta, taxpayers  can set off as well carry forward the losses only through the filing of an income tax return. It is also important to note that a taxpayer has to mandatory file the income tax return within the due date to be able to carry forward capital losses. The due date for filing the income tax return for the FY 2018-19 is 31 July 2019.