Capital Loss and Tax Calculation

Introduction

This article explores the possibilities for tax exemption when you incur the Capital Loss. In the previous articles I have written about the capital gains and special case on selling the agricultural lands. As we have mentioned short term capital gains and long term capital gains for calculating the taxable income, it is some what straight forward while you receive capital gains. It is little tricky when you receive the capital loss and it is not directly deducted from the taxable income. This article will explore with more details on how to calculate taxable income when there is capital loss. This article will present you with few real time examples and scenarios. I would like to hear feedback from you after reading the article. Please post it in the comments section. You can subscribe to our future articles here.

Types of Capital Loss

In the same way how the capital gains are classified, capital loss also falls in the following two categories:

• Short Term Capital Loss

If the capital loss arise from selling the short term capital assets is short term capital loss. If the property is hold for less then three years then it is considered as the short term capital assets. If Shares in a company or any other security listed in a recognized stock exchange in India or a unit of a Unit Trust of India or a  unit of a mutual fund specified under section 10(23D) held for not more than 12 month is considered as short term capital assets.

• Long Term Capital Loss

If the capital loss arise from selling the long term capital assets is long term capital loss. If the property is hold for more then three years then it is considered as the long term capital assets. If Shares in a company or any other security listed in a recognized stock exchange in India or a unit of a Unit Trust of India or a  unit of a mutual fund specified under section 10(23D) held for more than 12 month is considered as long term capital assets.

Tax Calculation for Capital Loss

It is some what tricky to understand the tax implications on capital loss. The following are the thumb rules for calculating the capital loss:

• Capital loss cannot be adjusted with any other source of income. For example, you incurred capital loss of Rs.100000 the same time you got the income of Rs.200000 from some other sources. You can not adjust your capital loss with any other head of income.
• Long term capital loss can be adjusted only with the long term capital gains.
• Short term capital loss can be adjusted with both short term capital loss and long term capital loss. Note that short term capital gain is considered as the normal income and will be added to the taxable income. But, in the case of short term capital loss it will be adjusted only with the capital loss.
• If the capital loss cannot be adjusted in the current years because there is no such capital gains, it can be carry forward to the next eight years and adjust if there is any capital gains.

Few Examples would Help

This section will provide the example with explanation. This will be useful for you to understand the capital loss.

Example-1

Mr. X bought a house worth Rs.800000 in 2008-09. He sells the house by 2012-13 for Rs.1500000. Also he met short term capital loss by selling the shares Rs.150000. In the above case Mr.X can carry forward the loss if he don’t have any other capital gains on the particular year when he incurred the capital loss. He can then adjust the Rs.150000 while selling the house on 2012-13. He can show the capital gains as Rs.700000 – Rs.150000 = Rs.550000. If you have any doubts understanding the calculation please post it in the comments section.

Summary

In this article I have explained about the capital loss and how to utilize the capital loss to adjust from other income. Since this subject is tricky the detailed explanation would help you to understadn the topic very well. Every day we are dealing with shares and capital assets, if there is any loss we should learn to how we can benefit from the unexpected loss. I hope you enjoyed this article. Thank you for reading the article!!! If you have any queries please post it in the comments section.

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