Jigar M. Patel
International Tax Attorney
The provisions relating to set off and carry forward of capital losses under the Income-tax Act provide as under:
- Long Term Capital Loss (LTCL) can be set off only against Long Term Capital Gains (LTCG) of the year and not against any other income.
- Short Term Capital Loss (STCL) can be set off against Short Term Capital Gains (STCG) or even LTCG of the year, but not against any other income.
- LTCL or STCL, which cannot be fully set off during the year, can be carried forward for set off against gain of any subsequent year in the aforesaid manner, for a maximum of upto 8 years.
Maximizing Tax Savings out of Losses
Keeping in view the above provisions, let us consider some smart strategies that can be designed by taxpayers for maximizing their tax savings.
Case Study-1: LTCG of Rs. 25 lakhs on sale of a plot of land by Mr. Jain during FY 2023-24 attracts tax at 20.8%. Since certain scripts in his stock portfolio have suffered an erosion of more than Rs. 25 lakhs, if he plans to book LTCL and set-off the same against the LTCG, he can save tax of Rs. 5.20 lakhs. Although LTCG on shares attracts tax at 10.4%, Mr. Jain can set off LTCL from shares against LTCG from land attracting tax at 20.8%, since there is no restriction in this regard prescribed under Section 70 of the Income-tax Act.
Case Study-2: Mr. Sharma has earned STCG of Rs. 10 lakhs on sale of gold during FY 2023-24 which attracts tax at 31.20%, keeping in view his other income of Rs. 15 lakhs for the year. If he plans to sell some of his shares purchased six months ago and is in a position to book STCL of Rs. 10 lakhs, he can set off such STCG and reap a resultant tax saving of Rs. 3.12 lakhs. Although STCG on shares attracts tax at 15.60%, the STCL from such sale can be set off against STCG from gold attracting tax at 31.20%, since there is no legal embargo in this regard.
Case Study-3: If in the above Case Study-2, Mr. Sharma has also earned STCG of Rs. 10 lakhs on shares, he will have the choice of setting off the Rs. 10 lakhs STCL from shares, either against STCG from shares or STCG from gold. His choice would have a material bearing on the actual tax payable, either at 15.60% or 31.20%.
In this case, relying on the clarification as contained in CBDT Circular no. 26 of 1955, Mr. Sharma can opt for the more beneficial set off. The said Circular states that, “there is nothing in the section indicating that a particular mode of set off shall be followed. In the absence of any such indication, the general rule to be followed in all fiscal enactments is that where words used are neutral in import, a construction most beneficial to the taxpayer should be adopted.” The Circular has directed that in such a case, the Department should adopt that mode which gives the taxpayer maximum benefit. This Circular has been also followed in a number of judicial pronouncements.
