Set-Off of Capital Losses: How to Claim in ITR and Carry Forward

When filing your Income Tax Return (ITR), one of the crucial aspects to consider is the set-off and carry forward of capital losses. Set-off and carry forward are provisions under the Income Tax Act that allow taxpayers to reduce their taxable income by adjusting capital losses from previous years against current or future capital gains. This can significantly help in minimizing the tax liability. Let us understand the concept of set-off and carry forward of capital losses, explore the latest updates on this front, and guide you through the process of claiming these benefits when filing your ITR.

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Table of Contents

• What is Set-Off and Carry Forward of Capital Losses?

• Latest Update: One-Time Relief in New Income Tax Bill 2025

• How to Claim Set-Off and Carry Forward in ITR

• Practical Example

• Key Points to Remember

• Conclusion

• FAQs

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What is Set-Off and Carry Forward of Capital Losses?

Set-off and carry forward are provisions that allow taxpayers to reduce their taxable income by using capital losses from the current year or previous years to offset capital gains.

• Set-Off: This refers to the adjustment of losses against the gains of the same financial year. For instance, if you have made a profit by selling a property, but also incurred losses from the sale of stocks in the same year, you can set off the losses against your gains, thereby reducing your overall taxable income for that year.
  

• Carry Forward: If the capital losses in a particular year exceed the capital gains, the remaining loss can be carried forward to future years. This allows taxpayers to offset the losses against future capital gains. For example, if you incur a capital loss of ₹1,00,000 in a year and have no gains to set it off, you can carry forward the loss and set it off against capital gains in future years.

These provisions are crucial for taxpayers who have capital losses, as they help in minimizing their tax liabilities over time.

Latest Update: One-Time Relief in New Income Tax Bill 2025

Under the upcoming Income Tax Bill 2025, there is a significant update regarding the set-off and carry forward of capital losses. The bill introduces a one-time relief for taxpayers who may not have utilized their capital loss set-off provisions due to a lack of capital gains in previous years. This relief is designed to allow taxpayers to claim carry forward of losses that have not been adjusted in the past, even if the statutory period for carrying forward losses had expired.

This provision will apply to both short-term and long-term capital losses, offering more flexibility to taxpayers in utilizing their past losses. The one-time relief is aimed at providing relief to individuals who had previously faced limitations on carrying forward losses due to the time frame restrictions.

How to Claim Set-Off and Carry Forward in ITR

Claiming set-off and carry forward of capital losses when filing your ITR involves the following steps:

• Determine Capital Gains and Losses: First, calculate the total capital gains and losses for the financial year. This includes gains or losses from the sale of assets like stocks, bonds, property, and mutual funds.
  

• Set-Off of Losses Against Gains: If you have capital gains in the same financial year, you can set off your capital losses against these gains. Short-term capital losses can be set off against both short-term and long-term capital gains, while long-term capital losses can only be set off against long-term capital gains.
  

• Carry Forward of Unutilized Losses: If your capital losses exceed your gains in the current year, the remaining loss can be carried forward to subsequent years. To do this, you need to declare the carry-forward losses in your ITR for the year in which the losses occurred. Once the losses are carried forward, you can set them off against capital gains in future years.
  

• Filing the ITR: While filing your ITR, you need to ensure that the capital losses are correctly reported in the relevant schedules (Schedule CG for capital gains) and the carry-forward is mentioned. Taxpayers must file their returns on time to ensure that they can carry forward their losses.
  

• Recordkeeping: Keep a record of your capital losses and the corresponding carry-forward balance for future years. The carry-forward losses will be carried forward for eight years, and you must report them each year until they are fully utilized.

Practical Example

Let’s consider a practical example to understand how set-off and carry forward work:

Suppose in FY 2024-25, you sell a stock for ₹3,00,000, resulting in a short-term capital gain of ₹1,50,000. In the same year, you sell a mutual fund for ₹2,00,000, incurring a capital loss of ₹1,00,000.

• Set-Off: The short-term capital loss of ₹1,00,000 from the mutual fund can be set off against the short-term capital gain of ₹1,50,000, reducing your taxable capital gain to ₹50,000 (₹1,50,000 - ₹1,00,000).

Now, let’s say you incurred an additional loss of ₹50,000 from the sale of another asset in FY 2024-25, resulting in a total capital loss of ₹1,50,000.

• Carry Forward: If you were unable to offset the full capital loss in FY 2024-25, you can carry forward the remaining ₹50,000 loss to future years. For example, if you have capital gains in FY 2025-26, you can set off this carried forward loss of ₹50,000 against those gains.

This process allows taxpayers to reduce their taxable income over several years and maximize their tax benefits.

Key Points to Remember

• Short-Term vs. Long-Term Losses: Short-term capital losses can be set off against both short-term and long-term capital gains, while long-term losses can only be set off against long-term capital gains.
  

• Carry Forward Duration: Capital losses can be carried forward for up to 8 years from the year in which the loss was incurred.
  

• Losses Must Be Reported: To carry forward capital losses, they must be reported in your ITR for the year in which the loss was incurred. You must also ensure that the carry-forward losses are reported in subsequent years when you use them.
  

• ITR Filing Deadline: Filing your ITR on time is crucial to ensure you can carry forward your capital losses. The loss can’t be carried forward if the return is filed late.

Conclusion

Set-off and carry forward of capital losses are valuable tax planning tools that help reduce your taxable income and minimize tax liability. Understanding how to claim these losses and make use of the one-time relief offered in the upcoming Income Tax Bill 2025 can provide significant financial benefits, especially if you have accumulated capital losses in previous years. Be sure to keep accurate records and file your ITR on time to take full advantage of these provisions and optimize your tax filings. For anyone looking for assistance in tax filing, it is highly recommended to download theTaxBuddy mobile app for a simplified, secure, and hassle-free experience.

FAQs

Q1: Can I carry forward capital losses indefinitely? No, capital losses cannot be carried forward indefinitely. According to tax laws, capital losses can only be carried forward for a maximum of 8 years. If these losses are not utilized to offset future capital gains within this period, they will lapse and cannot be used for any future tax assessments. To take full advantage of carrying forward losses, it is important to file your tax returns on time for the year in which the loss occurred.

Q2: Can I carry forward both short-term and long-term capital losses? Yes, both short-term capital losses and long-term capital losses can be carried forward, but they can only be set off against the respective types of capital gains in future years. For example, short-term capital losses can only be set off against short-term capital gains, and long-term capital losses can only be set off against long-term capital gains. This ensures that losses are used in the most appropriate manner, aligned with the type of gains they were incurred against.

Q3: Do I need to file my ITR on time to carry forward capital losses? Yes, it is crucial to file your ITR on time for the year in which you incurred capital losses. Failing to file your tax return within the due date will disqualify you from carrying forward those losses. The Income Tax Department requires taxpayers to report their capital losses in the return filed for the year of the loss, and timely filing ensures that these losses are recorded and can be carried forward to offset gains in the future.

Q4: Can I set off capital losses against other income like salary or business income? No, capital losses can only be set off against capital gains. They cannot be set off against any other sources of income, such as salary, business income, or professional income. This means that if you have capital losses but no capital gains in a given year, you can carry those losses forward to offset gains in future years, but they cannot be used to reduce taxable income from other sources.

Q5: How does the one-time relief in the Income Tax Bill 2025 work? The one-time relief in the Income Tax Bill 2025 allows taxpayers who had unutilized capital losses in previous years to carry forward those losses, even if they did not file their returns within the prescribed period. This provision aims to help taxpayers take advantage of losses they could not previously set off due to missed deadlines. With this relief, individuals will be able to adjust these losses against future capital gains, even if they had not filed returns for the years in which the losses occurred.

Q6: How do I report carry forward capital losses in my ITR? To report carry forward capital losses, you need to declare them in the ITR for each year they are carried forward. In the relevant sections of the ITR, there will be an option to mention previous year’s carried-forward losses. The losses will automatically be adjusted against any capital gains you report in the current year. This ensures that the losses are utilized efficiently to minimize taxable capital gains in future assessments.

Q7: What is the maximum amount of capital losses I can carry forward? There is no upper limit on the amount of capital losses you can carry forward, provided that you report them each year in your tax return. The key requirement is that these losses must be reported annually in the returns filed over the maximum period of 8 years. The loss will then be utilized against future capital gains, without any cap on the amount, as long as the reporting requirements are met and the losses are carried forward within the prescribed time frame.

Q8: Are there any exceptions to the carry forward of losses? Yes, one of the key exceptions to carrying forward capital losses is that they must be reported in an ITR filed on time for the year in which the losses occurred. If you fail to file your return for the year in which the capital losses were incurred, you will not be able to carry forward those losses. Therefore, it’s important to file your return on time, even if you have capital losses, to ensure that you can benefit from the carry-forward provision.

Q9: Can I carry forward losses from previous years if I change my tax regime? Yes, you can still carry forward capital losses even if you change your tax regime. Whether you switch from the old tax regime to the new tax regime or vice versa, the carry forward of capital losses remains unaffected, as long as you continue to report the losses in your tax return. The key point is that the losses must be disclosed properly in the tax filings, and the rules for carrying them forward are based on the time frame, not the tax regime choice.

Q10: Will the one-time relief apply to losses I haven’t reported in previous years? Yes, the one-time relief provision allows taxpayers to carry forward losses from previous years, even if they failed to report them due to missed deadlines. This relief is designed to give taxpayers a second chance to utilize the losses that were previously unaccounted for, even if the returns for those years were filed late or not filed at all. It’s a valuable provision to ensure that taxpayers don’t lose out on tax benefits from previous years’ losses.

Q11: What if I fail to report carried-forward capital losses in future returns? If you fail to report your carried-forward capital losses in future returns, you risk losing the ability to offset them against future capital gains. It is essential to include these losses each year to ensure they are utilized effectively. If you miss reporting them in any year, you may lose the benefit of those losses for that particular year, although they can still be carried forward if reported in subsequent returns within the 8-year period.

Q12: Can I use capital losses from one asset class to offset gains from another asset class? Yes, capital losses from one asset class (e.g., equity shares) can be used to offset capital gains from another asset class (e.g., real estate or mutual funds). There is no restriction based on the type of asset, so long as the gains and losses are both classified under capital gains. This gives you flexibility in offsetting losses from different investments, thus minimizing your overall tax liability.