The volume of investment in the stock market has increased multifold with the advancement of technology and ease of carrying on the stock market transactions.
A lot of investor’s wonder whether the loss incurred can be claimed as set off from their gains. Income Tax Act allows set off and carry forward of losses; however, there are rules and restrictions within which only one can benefit. In this piece, we will see how these rules are framed and how can you benefit from them.
Income Tax Act classifies stock market transactions into three different income categories: capital gains, regular business income, and speculative business income. The taxability of all these three categories of income is different based on the investor’s intention, frequency and volume of these transactions.
The gains are regarded as capital gains if the investor intends to hold and benefit from the appreciation in the value of the investment over time. Further, income tax classifies the gains from the purchase and sale of stocks (with delivery) and futures and options transactions as normal business. In contrast, intra-day trading, i.e. without stock delivery, is considered ‘speculative business’ transactions. Mutual fund investment is purely considered as capital investment and hence taxed as capital gains or losses.
Let us see the set-off provisions for these transactions if you have incurred the loss.
We will first understand what does set off and carry forward mean. Simply put, ‘set-off’ means claiming the loss incurred in the current year from the current year’s taxable income.
Whereas, ‘carry-forward and set-off’ mean if a loss cannot be set off entirely in the current year, then the same can be carried forward to subsequent years for absorption in accordance with the income tax rules.
For capital gains, the thumb rule is that the capital asset loss cannot be set off against any other income. Capital asset losses can be set off only against capital gains.
In the case of stock market investments classified as capital assets, their losses can be set off only against their gains in the current year or the next eight assessment years. Further, long term capital losses (LTCL) can be set off only against long term capital gains (LTCG). However, short term capital losses (STCL) can be set off against both, long term and short term gains.
For loss from trading of stocks and derivatives, which is regarded as a non-speculative business, it can be set off from the current year’s income of any other head except ‘income from salaries’. For instance, it can be set off from house property or other sources of the current year’s income. Suppose, current year’s income is insufficient to absorb the loss, then the same can be carried forward and set off only against the income from non-speculative businesses and professions. Such loss also can be carried forward for eight assessment years.
In the case of intra-day trading, which is regarded as speculative business, its loss can be set off only against speculative business gains. Such loss can be carried forward and set off only against speculative business gains for four assessment years.
Please note, to claim the ‘set-off and carry forward of losses’, one needs to file the return within the original due date only. Else, benefit of set off and carry forward will not be available.
The last date to file the return for the financial year 2020-21 is 31st of December 2021 for taxpayers other than covered under audit. Make sure you file your returns well in advance if you have losses to claim the benefit of set-off and carry-forward provisions.
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For any clarifications/feedback on the topic, please contact the writer at jyoti.arora@cleartax.in
I am a Chartered Accountant by profession with 4+ years of experience in the finance domain. I consider myself as someone who yearns to explore the world through travelling & Reading. I believe, the knowledge & wisdom that reading gives has helped me shape my perspective towards life, career and relationships. I enjoy meeting new people & learning about their lives & backgrounds. My mantra is to find inspiration from everyday life & thrive to be better each day.
