Turn losses into gains: How capital losses can help you save taxes
Source: Live Mint
Selling a stock, bond, mutual fund, or real estate at a loss may feel like a setback, but it can actually work in your favor at tax time. The Income Tax Act allows taxpayers to use capital losses to offset gains, reducing their tax burden.
Even if you can’t use the entire loss in a single year, you may carry it forward for future tax benefits. Here’s how you can turn losses into tax savings.
Understanding set-off rules
Capital losses can be used strategically to reduce tax liability, but they must be set off according to specific rules.
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“Long-term capital losses (LTCL) can only be adjusted against long-term capital gains (LTCG), while short-term capital losses (STCL) offer more flexibility, as they can be set off against both short-term and long-term capital gains,” said Nitesh Buddhadev, founder of Nimit Consultancy.
If capital losses exceed gains in a given financial year, they don’t go to waste. The remaining losses can be carried forward for up to eight assessment years, provided certain conditions are met. The loss must be declared in the income tax return (ITR) for the year in which it was incurred, and the ITR must be filed before the due date. Failing to do so means forfeiting the ability to carry forward the loss.
It’s also important to track how much loss remains available for future set-offs and ensure it stays within the allowable time frame.
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However, not all losses can be set-off against capital gains. Losses from speculative business activities, such as intra-day stock trading, cannot be set off against capital gains. Similarly, losses from lottery winnings, gambling, or betting are excluded and cannot be adjusted against any income, including capital gains.
Reporting capital losses in your ITR
When carrying forward capital losses to the next financial year, certain factors must be considered. Before setting off a loss, check whether it is still within the eight-year limit and determine how much of the balance remains or if it has already been exhausted in previous set-offs.
It is also crucial to ensure that the income tax return (ITR) for the year in which the loss was incurred was filed before the due date—failure to do so means the loss cannot be carried forward.
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To claim the set-off, taxpayers must accurately report capital gains or losses in their ITR. The details should be entered in Schedule CG of the ITR form to ensure compliance and avoid complications.
