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The long and the short of capital-loss and loss of capital. By K C Narang
If you incur a loss in your business accounts, it is considered by the Department of Income-Tax to be a Loss Of Capital. On the other hand, if you incur a loss on the sale of your investments, it is treated as a Capital Loss. This distinction is important because while the former -- which is classified under the category of business income -- is taxed at the maximum rate of 30 per cent, the latter -- which comes under the head of long-term capital gains -- is taxed at the flat rate of 20 per cent. What you should also remember is that:
What, then, is a capital asset? And when does it attract the long-term capital-gains tax -- and not the short-term capital-gains tax? Defined in Section 2(14) of the Act, the term 'capital asset' excludes from its ambit only stock-in-trade and personal effects. Even the latter does not include jewellery, gold, silver, clothes, and furniture made out of, or studded with, gold, silver, or precious stones. It also includes the right to immovable property, and the right to subscribe to a financial instrument. If a capital asset is held for more than 36 months -- except in the case of shares and specified securities, where the stipulated period is 12 months -- it is regarded as a long-term capital asset, according to Section 2(29B), read with Section 2(42A), of the Act. Because of the difference in the rates of income-tax applicable, one issue that arises is whether you can choose to pay your income-tax on your long-term capital gains, but carry forward your short-term capital losses in any assessment year. The answer is no -- because your income must first be computed under any 'head,' and both long-term capital gains and short-term capital losses fall under the head, Capital Gains. Because of the specific provisions of the law, wherever the computation results in a capital loss, and since this cannot be adjusted against any other income, you must ensure that your tax-return is filed before the due date specified in the explanation to Section 139(1) of the Act. This is because the peculiar, and harsh, provisions of Section 80 of the Act deny the carry-forward of a loss if there is even a day's delay in the filing of a return. A return is deemed a loss-return so far as a capital loss is concerned even if you pay a tax on your other income. Of course, it is also possible to take the view that the loss has not been lost because of a delayed return since the total income is positive. But then, I have always found that listening to the law is always preferable to litigation when it comes to income-tax. In arrangement with the Bombay Chartered Accountants' Society |
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Even if you do file your income-tax returns every
year, you may not know that the Income-Tax Act, 1961, actually differentiates between Loss
Of Capital and Capital Loss. 