InvestorQ : Can you explain the tax shields on losses in greater detail and how it is applied in practice?
Chandralekha Desai made post

Can you explain the tax shields on losses in greater detail and how it is applied in practice?

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Mitali Bhutta answered.
1 year ago
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Broadly, the definition of capital loss is exactly like the case of capital gains. We need to remember these two basic points here:

· A loss on sale of a long term capital asset will be treated as a long term capital loss (LTCL).

· A loss arising on sale of a short term capital asset will be treated as a short term capital loss (STCL)

Tax shields on losses are of 3 types based on the nature of shield that you get on these losses. They are as under:

· Setting off current year losses is the first benefit. Losses in the current fiscal year can be set off against gains in the current year. There are restrictions on which head of loss can be set of against which head of income, which we shall deal with in detail later in this chapter.

· Carry forward of losses is the second tax shield benefit that you get where current year’s gains are insufficient to cover the losses for the current year. All losses including capital losses can be carried forward for a period of 8 assessment years following the year in which the loss is booked. However, speculative losses can only be carried forward for a period of 4 assessment years as against 8 assessment years for other losses.

· Losses can also be brought forward from previous years where they have not been fully absorbed by the gains of the previous years.

These rules only apply to STCG and to LTCG and not to speculative gains or gains from lotteries and horse racing. These are speculative income and treated differently.
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