Setting off and carry forward of losses in equity shares

Vasan, a professional banker had been dabbling in stocks for the last few years. In the course of his discussion with his friend Prakash on the recent monetary policy review, and its impact on stock markets, he casually remarked that unlike last financial year, he had made decent gains in stock markets.

And hence was mulling setting off the short-term gains that he had made against the short-term losses that he had made last financial year but was skeptical whether income tax rules permit such set off or carry forward.

He also wanted to know whether he could set off the short-term gains in shares this year against his salary income, as he felt that the income tax paid by him after all was on the overall income earned during a financial year.

Many of you also would have through such situations in your life. Before we understand the nuts and bolts of capital gains and whether the losses can be set off and carried forward, let’s find out what are the different sources of income recognised under the Income-tax Act.

Heads of income under the Income-tax Act
 Income from salary
 Income from house property ( Rental Income)
 Profits and gains of business or profession

 Capital gains from investments in assets like land, building, MFs, shares, gold etc.
 Income from other sources like dividend or interest income, winnings from lottery, horse racing etc.

Is inter head set off is possible?

In the above scenario, can Vasan set off the short-term loss in shares against his salary income? Unfortunately, he cannot as he cannot set off short-term loss in shares against other heads of income.

Is intra head set off possible then?

Yes, you can set off losses in shares against gains in shares as both come under the head ‘Capital gains’. However, you need to understand the difference between short-term gains and long-term gains in shares to appreciate set off.
Short-term gains in shares (equity) will arise if the period of holding is less than 12 months.

And one needs to pay short-term capital gains tax (STCG) of 15 % on the STCG (profits) one makes. If you had bought hundred shares of a company listed on any stock exchange in India for Rs 1 lakh and had sold it for Rs 1.20 lakh after nine months, you have to pay STCG tax of Rs 3,000 (15% on Rs 20,000).

On the other hand, in the said example if the investment was held for more than 12 months it would be deemed as long-term capital gain and under Income-tax Act, there is no tax on LTCG in equity shares of a listed company. It is also true that all investments need not result in capital gains.

Some of them may result in capital loss. The question though is, can you carry forward these losses to future years and set them off against capital gains? Yes, you can.

Some of the provisions of IT Act are as follows:

Short-term capital loss can be set off against short term capital gain or long- term capital gain in a given financial year. Long-term capital loss can only be set off against long-term capital gain

Therefore, to recap the Income Tax provisions on set off, you can set off the short-term capital loss from equity against short-term gain from equity.

The short-term loss which could not be set-off during the current year, can be carried forward to eight subsequent financial years and can be set-off against any capital gains (short-term / long-term capital gain) arising in future years.

However, the loss can be carried forward and set off only if the assesse has filed the tax return for the previous year within the prescribed due date.

(The writer is a former banker, and is currently teaching at Manipal Academy of Banking, Bengaluru)