Facing Stock Market Losses This Year? Here’s How You Can Save Income Tax

Capital losses are usually faced by investors while trading in stocks, property, or other investment products. In the current financial year 2024-25, the stock market has experienced relentless sell-off since September 2024, which has impacted investors of all categories, whether long-term investors or F&O traders. However, it can help you save income tax, as various provisions of the Income Tax Act permit taxpayers to offset and carry forward capital losses, thereby saving tax liability in the same year for a period of eight years.

Below is all you should know regarding the set-off and carryforward of capital gains and losses and regulations thereof.

Types of Capital Gains and Losses

Under the Income Tax Act, capital gains are divided into two types:

1. Short-Term Capital Gains (STCG): Profits from the sale of assets such as equity shares or units of equity mutual funds held for a short period. For listed assets, this is 12 months, and for unlisted assets, it is 24 months. The STCG tax was previously 15% but Budget 2024 raised it to 20%.

2. Long-Term Capital Gains (LTCG): Profits on assets held for a longer period, i.e., over 12 months for listed assets and 24 months for unlisted. The rate of LTCG tax is 12.5 % post-Union Budget 2024, up from 10% previously.

Similarly, capital losses are also categorized as short-term capital loss (STCL) and long-term capital loss (LTCL).

Notably, LTCG up to Rs 1.25 lakh during a financial year is tax-exempt.

Set-Off of Capital Losses

Capital losses are available to be set off against capital gains. For instance, if you have incurred a short-term capital loss of Rs.50,000 on shares of a company in a financial year and earned a short-term capital gain of Rs. 50,000 on shares of some other company. This offsets the STCG with STCL and hence there is no tax payment by investors. The following are the rules:

1. Short-term capital loss (STCL) can be set off against short-term and long-term capital gains in the same year.

2. Long-term capital loss (LTCL) can be set off against long-term capital gains. Significantly, capital losses cannot be adjusted against any other income heads, including salary, business income, or house property income.

Carry Forward of Capital Losses

If the losses can’t be totally set off against in the same year of expenditure because there weren’t enough gains, they will be carried over for adjustment at a later stage. For instance, you incur a short-term capital loss of Rs. 50,000 from a company’s equity shares for a financial year and earn a short-term capital gain of Rs. 30,000 from another company’s shares. Here, the adjustment of Rs. 20,000, which could not be adjusted this year, can be carried forward in the next eight years. Therefore, this loss can be utilized to avoid taxes on similar gains for the next eight years.

Rules for carrying forward losses are:

• Capital losses can be carried forward for eight assessment years.
• The losses are available for setoff only against the same class of income in future years, i.e., LTCL against LTCG and STCL against STCG/LTCG.
• The assessee has to submit their income tax return (ITR) by or on the due date as per Section 139(1) in order to avail of carryforward relief. Late submission results in forfeiture of this relief.
• Loss on house property can be adjusted against income under any head to an extent of Rs 2 lakhs.

Inter-head adjustments as per the rules given in the FAQs on the website of the income tax department are as follows:

Loss from speculative business cannot be adjusted against any other income. Non-speculative business loss, however, can be adjusted against speculative business income.

Loss under the head of “capital gains” cannot be offset against income under any other head of income.

No loss can be offset against income from winnings from lotteries, crossword puzzles, races, including horse races, card games, and any other game of any kind or from betting or gambling of any kind or nature.

Loss from businesses of keeping and breeding race horses cannot be offset against any other income.

Loss from business covered under section 35AD cannot be set off against any other income (section 35AD is available in respect of certain specified businesses, such as the establishment of a cold chain facility, establishment and operation of warehousing facility for storage of agricultural produce, development and construction of housing projects, etc.)

Loss from business and profession cannot be set off against income assessable under the head “Salaries.”

According to the sources, if you have a loss from one house property, you can set it off against income from any other house property. If even this leaves you with a loss, you can set it off against other income, but only to the extent of Rs. 2 lakh per annum. Any loss over Rs. 2 lakh cannot be adjusted against any other income during the same year.

By knowing and using these set-off and carry-forward provisions, investors are able to reduce their tax liability when confronting capital losses. Adequate planning of taxes and filing the ITR within time can assist people in making optimal use of these provisions and lowering their total tax liability.