Lost money on stocks or mutual funds this year? Don’t skip declaring your capital losses in ITR

If you’ve incurred losses from any sale of shares, mutual funds or property this year and are unsure of reporting in the Income Tax Return (ITR), the short answer is – Yes, you should absolutely report it, even if you didn’t make any profit.

There’s a good reason for declaring losses, according to financial planners. “It’s very important to mention capital losses while filing income tax return. This will help you to set it off against future income,” said Sujit Bangar, founder of TaxBuddy.

When filing income tax returns, the concept of set-off plays a vital role in reducing your taxable income. A set-off essentially means adjusting one’s losses against income from other sources in the same financial year. This process happens in two stages – intra-head adjustment and inter-head adjustment. Under intra head adjustment, losses can be set off against similar income taxable under the same head of income, while inter-head comes into play only if losses remain after exhausting all intra-head possibilities.

Short-term and long-term capital losses are treated differently under taxation rules. A short-term capital loss can be set off against any kind of capital gain – whether short-term or long-term. This flexibility helps in reducing tax liability, particularly when you’ve made profit from long-term investments.

However, the rules are stricter for long-term capital loss, and it can only be set off against long-term capital gains and not against short-term gains, even though both fall under the same income head. This limitation often surprises taxpayers who assume all capital gains and losses are interchangeable.

Moreover, if your capital loss – whether short-term or long-term – exceeds gains or if there are no gains in the current year, you don’t lose the tax benefit. The Income Tax Act allows you to carry forward these losses for up to eight assessment years, provided you report them in your income tax return filed within the due date.

Proper reporting and classification of capital losses not only reduces your current year’s tax liability but also create future opportunities to lower tax when you realize capital gains. Hence, keeping a clear record and making accurate disclosures in your ITR is essential for long-term tax planning.