Understanding Capital Loss: Meaning, Types, and Tax Implications

A capital loss occurs when the sale price of a capital asset is less than its indexed cost of acquisition. While seeing a "red" portfolio is never ideal, savvy investors understand that capital loss can be a powerful tool for tax optimization through the mechanisms of "Set-off and Carry Forward" as defined by the Income Tax Act, 1961.

In the Indian financial landscape, selling assets like stocks, mutual funds, or real estate at a price lower than their purchase cost results in a loss that can be "set off" against gains. This guide, curated by Hero FinCorp (a regulated NBFC), explores what is capital loss, its various types, and how to leverage short term capital loss carry forward and long term capital loss carry forward rules to minimize your tax liability in the 2025-26 assessment year.

What is Capital Loss?

Capital loss meaning refers to the negative difference between the consideration received from the sale of a capital asset and its cost of acquisition. According to the Income Tax Act, 1961, a loss is only "realized" when the transaction is complete; a dip in market value without a sale is merely a "notional" or "unrealized" loss. For tax purposes, only realized losses are eligible for set-off benefits under Section 70.

How Capital Losses Occur?

Capital loss typically occurs due to market volatility, economic shifts, or company-specific downturns. For instance, a change in the Reserve Bank of India’s repo rate (which stands at 6.50% as per RBI Monetary Policy Committee reports) might affect bond prices, or a global recession might impact equity valuations.

Formula to Calculate Capital Loss

To calculate capital loss, use the following formula-

Capital Loss = Total Cost Basis − Selling Price

The total Cost Basis includes the purchase price and any additional costs incurred during the asset acquisition.

Negative Result: If the result of this calculation is positive, it indicates a capital gain rather than a loss. A capital loss occurs when the selling price is less than the purchase price (or total cost basis).

Realisation: Remember that a capital loss is only recognised when the asset is sold. Until then, any decline in value is considered an unrealised loss.

Read Also - What are the Types of Working Capital Policies?

Example of Capital Loss Calculation

Consider an investor who purchased 100 shares of a company at ₹400 each (Total: ₹40,000). Due to a market correction, the investor sells them at ₹200 each (Total: ₹20,000).

The calculation is:

$$\text{Capital Loss} = \text{Cost of Acquisition} - \text{Sale Consideration}$$

$$\text{Capital Loss} = ₹40,000 - ₹20,000 = ₹20,000$$

This realized loss can now be used to reduce the tax burden on other profitable investments, provided the investor follows the "inter-source" and "inter-head" set-off rules stipulated by the Ministry of Finance.

Types of Capital Loss in India

In India, the classification of a capital loss depends on the holding period, which varies by asset class (e.g., 12, 24, or 36 months).

1. Short-term Capital Loss (STCL)

A short term capital loss arises from the sale of assets held for less than the prescribed period (e.g., less than 12 months for listed equity shares). Per Income Tax Section 70, short term capital loss is flexible; it can be set off against both short-term and long-term capital gains.

2. Long-term Capital Loss (LTCL)

A long term capital loss occurs when an asset is held beyond the threshold (e.g., more than 24 months for real estate or 12 months for listed stocks). Crucially, under Section 70(3) of the Income Tax Act, long term capital loss can ONLY be set off against Long-term Capital Gains (LTCG). It cannot be adjusted against short-term gains.

Rules for Carry Forward of Capital Losses

If your total losses exceed your gains in a single financial year, you don't lose that tax benefit. Section 74 of the Income Tax Act provides the following provisions:

• Short term capital loss carry forward: Can be carried forward for 8 assessment years and set off against any capital gains (short-term or long-term).
• Long term capital loss carry forward: Can be carried forward for 8 assessment years but only set off against long-term gains.

Important Compliance Note: To claim this benefit, you must file your Income Tax Return (ITR) on or before the original due date specified under Section 139(1). Failure to file on time results in the forfeiture of the right to carry forward these losses.

How Capital Loss Affects Your Personal Loan Eligibility?

As a regulated NBFC, Hero FinCorp evaluates your financial health holistically. While capital loss is primarily a tax concern, it can subtly influence credit assessment:

• Income Impact: Persistent losses may reduce your "Other Income" category, potentially lowering the loan amount you qualify for during the Debt-to-Income (DTI) ratio analysis.
• Liquidity Profile: Significant realized losses might indicate a reduction in liquid net worth, which lenders consider for high-value unsecured loans.
• Credit Score Myth: Note: Selling an asset at a capital loss does NOT directly decrease your CIBIL score. Your credit score is impacted by repayment history and credit utilization, not investment performance.

Summary of Capital Loss Set-off Rules

Frequently Asked Questions

Can I set off capital loss against salary income?

No. Under Section 71, capital losses cannot be set off against income from salary, house property, or any other head; they can only be adjusted against capital gains.

What is the benefit of short term capital loss carry forward?

It allows you to reduce your future tax liability by deducting current losses from future profits for up to 8 years, providing a "tax shield" for your future portfolio growth.

Does capital loss mean a permanent loss of money?

A "realized" capital loss is permanent as the asset is sold for less than its cost. An "unrealized" loss is a temporary drop in market value; the loss only becomes "tax-visible" once the sale is executed.

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