What is Capital Loss?

Explanation

As per the income tax provision, if the assessee sells any capital assets, they need to calculate the gain or loss on assets. When the sales price of an asset is higher than the cost of acquisition, expenses for improvement of assets, and the cost of transfer of assets, then it is capital gain. If consideration doesn’t cover all this cost, it is a capital loss. Indexation is allowed in the cost of acquisition and improvement if an asset is a long-term asset. Long-term and short-term are calculated based on the holding period, i.e., from the acquisition date to the transfer/ sale of assets.

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Capital Loss Formula

How to Calculate?

The following are the steps for calculation:

Step 1: Finds out whether assets are capital assets; In the case of capital assets, it is chargeable in income from capital gain.

Step 2: Find out the nature of capital gain, whether it is a short-term capital gain or long-term capital gain. The period of holding assets defines the nature of capital gain. For each class of assets, the holding period is different for long-term capital gain or loss. For example- in the case of immovable property, 24 months for long-term holding & less than this is short-term holding.

Step 3: Find the consideration as per the income taxProvision Of Income TaxProvision for Income Tax is the estimated income tax for current year and is the amount that the entity might have to deposit to settle their tax liabilities. It is adjusted for the expenses allowed to be deducted according the relevant tax laws.read more provision.

Step 4: Calculation the cost of acquisition or index cost of acquisition. Indexation is required to calculate the acquisition cost if the asset is a long-term asset. In case the acquisition cost is not identifiable, then it is required to calculate the deemed acquisition cost.

Step 5: If any expenses are made for the acquisition of assets or expenses made after the acquisition of assets like an improvement, those expenses will be considered while calculating capital gain/Loss.

Step 6: If any expenses are made for the transfer of assets, those expenses will also be considered in the calculation.

Step 7: The cost of acquisition or index cost of acquisition will be deducted from consideration, any expenses made for improvement will be deducted from consideration, and any expense made for the transfer of capital gain will be deducted from capital gain. Suppose consideration is more than the cost of acquisition or index cost of acquisition, cost of improvement, and transfer of assets. In that case, it is capital gain, or if consideration is less than this, it is a capital loss.

Example

Let us understand the example in detail:

ABC LLP purchased land & building in 2010-11 of Rs. 30 Cr. out of which 10Cr. For land and 20 Cr. for building. ABC LLP is selling this land and building for Rs. 45 Cr. of which 15 Cr. for land and 30 Cr. for building. ABC also holds the following quoted equity shares-

  • 4000 shares of SI limited @ 700 per shares purchased as in March 20193500 shares of MR limited @450 per shares purchased as in Feb 20196000 shares of RI limited @600 per shares purchased as in June 2019

ABC LLP sold these shares in Dec 2019; the selling price is as follows-

  • Shares of SI Limited @ 650 per shareShares of MR Limited @ 420 per shareShares of RI Limited @ 590 per share.

Indexation of 2010-11 is 167, and 2019-20 is 289. Calculation of capital gain/ capital loss-

Solution:

For Building

  • = 300000000 – 346107784.4= (46107784)

For Land

  • = 150000000 – 173053892= (23053892)

Calculation on Shares-

#1 – SI Limited 4000 Shares

  • = 2600000 – 2800000= (200000)

#2 – MR Limited 3500 Shares

  • = 1470000 – 1575000= (105000)

#3 – RI Limited 6000 Shares

  • = 3540000 – 3600000= (60000)

Now we will calculate total capital loss as shown below:

  • = (46107784) + (23053892) + (200000) + (105000) + (60000)= (69526676)

As per the income tax provision, capital losses can only be set off with capital gain. It cannot set off with any other source of income.

Short-term capital gain can be offset with long-term capital gain and short-term capital gain. But the long-term capital gain can only be set off with long-term capital gain.

Difference Between Capital Loss and Capital Gain

Below are a few differences:

#1 – Capital Gain

Capital gain is raised in the value of capital assets or profit on the sale of capital assets. When the sale price of capital assets is higher than the purchase price of assets, it is capital gain. In the case of capital gain, it is chargeable with 20% tax

#2 – Capital Loss

It decreases the value of assets i.e., when the sale price of assets is lower than the purchase price or index cost of acquisition. Such losses can be carried forwardLosses Can Be Carried ForwardTax Loss Carry forward is a provision which permits an individual to take forward or carry over the tax loss to the next year to set off the future profit. Any taxpayer can claim it to lower the tax payments in the future.read more for the next eight years.

Conclusion

Short-term and long-term losses are defined through an asset’s holding period. It decreases the value of capital assets; at the time of sale of capital assets, if the consideration received is lower than the cost of acquisition, expenses for the transfer of assets, etc., then this is a capital loss.  It can be set off with capital gain only.

This has been a guide to what capital loss is and its definition. Here we discuss the formula and calculation of capital loss along with an example. You can learn more about financing from the following articles –

  • IndexationCalculate Capital Gains YieldCapital Loss CarryoverCalculate Gain529 Plan