Investment of any type is subject to risk, and you can end up losing your investment for wrong speculations. Yet, capital losses are unavoidable at times. Like, capital gain, capital losses also exist in the system. But, did you know that it can be a boon in disguise in lowering your tax burden? Claiming capital loss in your tax filing can help you mitigate some of the investment loss in terms of reduced tax deduction. Experienced investors, who are fully aware of tax rules, often apply future capital losses to minimise tax level.
Not many investors are aware that they can claim capital loss in their income tax return. So, how can you do it? To answer the question, we need to clear our ideas of capital loss and the process of reporting it.
What is capital loss?
A capital loss is the opposite of capital gain. That is, making a loss in a transaction. In simple terms, when you have to sell an asset at a lower value than your buying price, you earn a negative income on it or a loss. For instance, you have purchased 100 stocks of a company at Rs 250 apiece in anticipation that stock prices will go up. So, you made a total investment of Rs 25,000. Now suppose, the rate of the stock went down, and you end up selling your shares Rs 225 apiece. You make a loss of Rs 2,500 in the deal. If we capture capital loss in a formula, it will be
Capital Loss = Purchasing Price – Selling Price
There are three types of capital losses, namely realised losses, unrealised losses, and recognisable losses. Further, capital losses are sub-categorised based on the holding period of the investment – short-term losses (investment period less than one year), long-term losses (investment period is more than a year).
- Realised loss:Losses arising due to actual sale of the asset
- Unrealised losses:These are the losses that aren’t yet reported.
- Recognisable losses:It is the amount of loss that can be declared in a given year.
Reporting capital loss
A capital loss is deductible under the tax laws, but to claim it, you need to know the proper way of doing it. Not all income losses qualify as a capital loss, and hence, clarity over its definition is essential.
In filing personal income tax, a capital loss can be reported to offset a capital gain. The concept of capital loss can be declared only on items or assets that are intended to appreciate with time. Please don’t think that you can apply for the capital loss on things like an automobile, which you have purchased for personal use.
Moreover, the capital loss can offset only capital gains. You can’t adjust capital loss against other forms of income like salary, house property, or business incomes. At the same time, you can offset a capital loss against a similar type of capital gain. Hence, long-term capital losses must adjust only against long-term gains, and similarly, short-term losses align with short-term gains.
If you don’t have a capital gain to adjust against a capital loss in the current financial year, don’t worry! You can carry forward it for eight years and set off against a capital gain when it arises.
The crux of the thing is, capital losses are deductible under the income tax laws, but only against capital gains of similar nature. For that, you need to know which losses you can enlist and which you can’t. It will be useful to know that long-term losses arising from share selling or mutual funds where STT (Security Transaction Tax) is applied can’t be listed for a tax deduction. Losses arising from such transactions on which STT is paid called dead loss.
However, to claim a tax deduction on your capital loss, you must file your income tax return before the due date. The advantages of carrying forward your capital loss in the future years aren’t allowed for filing a belated return after the due date. So, be careful!