Capital gains arise from the sale of assets other than those held in the
ordinary conduct of business. In India, capital gains tax is levied within the
framework of Indian Income Tax Act, 1961. Sections 45 to 55A of the Act relate
to the taxation of capital gains. Since capital gains are not annual accruals
from a given source but represent appreciation in the market value of assets
over a period of time, they are treated on a different footing. The preferential
treatment is given to long-term capital gains only.1
When one aspires to earn the profit, there is an equally likely chance of
incurring losses too. However, the Income-tax law in India does provide
taxpayers some benefits of incurring losses too. The law contains provisions for
set-off and carry forward of losses. Set off means adjusting the losses against
the profit of that Financial Year.
In case there are no adequate profits to set off the entire losses, it can be
adjusted in the coming financial years according to the statute. A set-off could
be: An intra-head set-off: The losses from one source of income can be set off
against income from another source under the same head of income. An Intra-head
set off : After the intra head adjustments, the taxpayers can set off remaining
losses against income from other heads.
Gain arising on transfer of capital asset is charged to tax under the head
"Capital Gains". Income from capital gains is classified as "Short Term Capital
Gains" and "Long Term Capital Gains." This is concept was introduced to provide
relief to taxpayers who incur losses in a particular financial year.
The Set-off and carry forward of loss assist taxpayers to settle the losses they
incurred against the income they gained or the profit they made. Sometimes, all
the losses do not settle against this year's profit if the losses are high
compared to the gains. In such cases, those losses can be carried forward into
the profits of subsequent years.
Set-off and carry forward of loss happens when you calculate your capital gains,
and the capital gains appear to be lesser than the cost of acquisition. Set-off
and carry forward of loss can be measured by adjusting the gain or loss of that
specific year. However, the rule is that the losses from capital gain cannot be
set off against income in any other way. It could only be settled with capital
loss from property investment can only be settled against
the profit of another property investment. You cannot fix these losses with
other income, such as bonds and stocks. This is the set-off and carries forward
of losses meaning.
Meaning of Capital Gains
Profits or gains arising from transfer of a capital asset are called "Capital
Gains" and are charged to tax under the head "Capital Gains".
Definition of Capital Gains
Section 45 of Income Tax Act, 1961 provides that any profits or gains arising
from the transfer of a capital asset effected in the previous year will be
chargeable to income-tax under the head 'Capital Gains'. Such capital gains will
be deemed to be the income of the previous year in which the transfer took
place. In this charging section, two terms are important. One is "capital asset"
and the other is "transfer".
Definition of Capital Asset
According to section 2(14), a capital asset means:
However, it does not include:
- property of any kind held by an assessee, whether or not connected with his
business or profession;
- any securities held by a Foreign Institutional Investor which has
invested in such securities in accordance with the SEBI regulations.
- Any stock-in-trade consumable stores or raw materials held for the purpose
of the business or profession of the assessee;
- Personal effects, that is to say, movable property (including wearing
apparel and furniture) held for personal use by the assessee or any member
of his family dependent on him, but excludes:
- Archaeological collections;
- Sculptures; or
- Any work of art.
- Rural agricultural land in India
- 6�% Gold Bonds, 1977, or 7% Gold Bonds, 1980, or National Defence Gold
Bonds, 1980, issued by the Central Government;
- Special Bearer Bonds, 1991 issued by the Central Government;
- Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified
by the Central Government.
Short Term and Long Term Capital AssetsThe short-term capital asset is a capital asset held by an assessee for not more
than 36 months immediately preceding the date of its transfer. Therefore, a
capital asset held by an assessee for more than 36 months immediately preceding
the date of its transfer is a long-term capital asset.
However, a security
(other than a unit) listed in a recognized stock exchange, or a unit of an
equity oriented fund or a unit of the Unit Trust of India or a Zero Coupon Bond
will be considered as a long-term capital asset if the same is held for more
than 12 months immediately preceding the date of its transfer. In the case of
Immovable Property (land or building or both) hold for more than 24 months then
it will be treated as a long-term capital asset.
This implies that an unlisted security and unit of a debt-oriented mutual fund
would qualify as a "long-term capital asset" and be eligible for the benefit of
indexation and a concessional rate of tax@20% only if it is held for "more than
Tax on Long-Term Capital Gains
Where securities transaction tax is applicable (in case of equity shares and
equity-oriented MF): If securities transaction tax is applicable, the long-term
capital gain is taxable at the rate of 10% + Surcharge and Education Cess.
Although such capital gain up to Rs.1,00,000 is not taxable under section 112A.
In all other The long-term capital gain is taxable at 20% + Surcharge and
Tax on Short-Term Capital Gains
Where securities transaction tax is applicable (in case of equity shares and
equity-oriented MF): If securities transaction tax is applicable, the short-term
capital gain is taxable at the rate of 15% + Surcharge and Education Cess.
In all other cases: The short-term capital gain is taxable according to the
income tax slab rate.
Mode of computation of capital gains
- he income chargeable under the head 'capital gains' shall be computed by
deducting the following items from the full value of the consideration
received or accruing as a result of the transfer of the capital asset:
- Expenditure incurred wholly and exclusively in connection with such
- The indexed cost of acquisition and indexed cost of any improvement
- However, no deduction shall be allowed in computing the income
chargeable under the head "Capital Gains" in respect of any amount paid on
account of securities transaction tax under Chapter VII of the Finance
(No.2) Act, 2004.
As per section 48, the cost of acquisition will be increased by applying the
Cost Inflation Index (CII). Once the cost inflation index is applied to the cost
of acquisition, it becomes an indexed cost of acquisition. This means an amount
which bears to the cost of acquisition, the same proportion as CII for the year
in which the asset is transferred bears to the CII for the first year in which
the asset was held by the assessee or for the year beginning on 1st April 2001,
whichever is later.
Similarly, indexed cost of any improvement means an amount which bears to the
cost of the improvement, the same proportion as CII for the year in which the
asset is transferred bears to the CII for the year in which the improvement to
the asset took place.
- Special provision for non-residents
In order to give protection to non-residents who invest foreign exchange to
acquire capital assets, section 48 contains a proviso.
Accordingly, in the case
of non-residents, capital gains arising from the transfer of shares or
debentures of an Indian company is to be computed as follows:
The cost of
acquisition, the expenditure incurred wholly and exclusively in connection with
the transfer and the full value of the consideration are to be converted into
the same foreign currency with which such shares were acquired.
capital gains shall be reconverted into Indian currency. The aforesaid manner of
computation of capital gains shall be applied for every purchase and sale of
shares or debentures in an Indian company. Rule 115A is relevant for this
purpose. Non-residents and foreign companies to be subject to tax at a concessional rate of 10% (without indexation benefit or currency fluctuation) on
long-term capital gains arising from the transfer of unlisted securities
Meaning of set off of Losses under Income Tax Act, 1961: Set off means setting
of losses against profits of same head of income or may be different during the
Meaning of carry forward of losses under Income Tax Act, 1961:Carry forward of
losses means carrying the losses amount to be set off against profits of one
head or other head.
Provisions of carry forward of losses:
- Intra head adjustments:
Intra head adjustments are relating to set off losses of same head with
profits of same head but there are exceptions of it are as follows:
- Speculation losses of business:
Speculation losses of business are only set
off against speculation business not of any normal business profit.
- Losses of long term capital gains:
Losses of long term capital gains are
only set off against profits of long term capital gains.
- Losses of short term capital gains:
Losses of short term capital gains are
only set off against profits of short term capital gains.
- Losses from casual:
loss from lottery, crossword puzzles, or any game sort
like this or gambling or betting
- Losses from owning and maintaining horse races:
the losses of owning and
maintaining horse races are only to be set off against profits of owning and
maintaining of race horses.
- Inter head adjustments:
Inter head adjustments are the adjustments of losses with other heads of
income . but there are some exceptions of it are as follows:
- Losses of business and business and profession cannot be set off
against profits of salary head.
- Losses of capital gains cannot be set off against with other heads. In
case , of house property; loss more than 2 lakhs cannot be adjusted against other head
- Speculation business
Speculation business losses cannot be set off against
profits of normal business , it only to set off against profits of speculation
business. � Losses of long capital gains :- losses of long capital gains are
only to be set off against profits of long capital gains .. not from the profits
of short term capital gains � Losses of short term capital gains :- losses of
short term capital gains are only to set off against profits of short term
- Losses from lotteries, crossword puzzles , or any game sort like this ,
gambling or betting .. are only to be set off against profits of casual income.
- Losses from owning and maintaining of horses race are only to set off
and carried forward against profits of maintaining of horse races.
The set-off and carry forward of loss is a technique implemented by the
government to help taxpayers with losses. Such losses can be settled against
profits from the same year and a few subsequent years. Losses from one head can
also be resolved with earnings from other categories. The set-off is of two
types: The intra-head set-off and the inter-head set-off. The profits from
activities like gambling, card games, horse care, and lotteries are not
considered during set off. There is a period beyond which the loss cannot be