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Order of Capital Gain setoff and Section 54 exemption

Ashwin (AFP) (93 Points)

16 June 2011

A person has some LTCG (Rs. 10,00,000) and he has invested the entire gains in REC bonds eligible in section 54, his net LTCG after considering sec 54 exemption becomes 0.

Now if the the person incurred a LTCG loss of 2,50,000 what is his net LTCG for the year?

If I setoff this loss against the 10 lakh gain, then net LTCG becomes 7.5 lakh, which is adjusted against sec 54 exemption to make it 0 LTCG (2.5 lakh will be extra unsused exemption u/s 54). However, if I first adjust the LTCG of 10 lakh u/s 54 to make it 0, then the LTCL of 2.5 lakhs will be unadjusted and carried forward to next year (which will definitely be beneficial to him next year).

What is the correct way? Do I make LTCG 0 or a LTCL of 2.5 lakh carried forward?

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5 Replies

Arvind Sharma (ACA) (1432 Points)
Replied 16 June 2011

first way is correct........

If you look at Exemption u/s 54 series., all are available wrt sold/transfered asset, ie one to one relationship.

So, that exemption you have to utilised fully for that assets gained Rs. 10Lacs and other asset bearing loss has no adjustment other than carried forward the same...

Hence, the correct way is to carry forward that Capital Loss.

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Vishal Patel (CA CPA (License Awaited)) (332 Points)
Replied 16 June 2011

yes agree with arvind .........correct way is to carry forward it to next year and it is eligible for set off in next year aganist LTCG

Ashwin (AFP) (93 Points)
Replied 16 June 2011

Thanks Vishal and Arvind for replying. I thought so too. But the doubt cerpt in because the ITD Excel for ITR does it the second way. As per the excel sheet formula, total LTCG and Carry Forward LTCL are both 0. THis is because it first sets off LTCL against LTCG before considering sec 54 deductions.

I cross checked against the calculation by tax-smile, it too does the same thing, 1st balance LTCG against losses, then exempt the remaining against sec 54 deduction. The one-2-one application is done only to check eligibility of the deduction vis-vis the date of purchase of the bond vs date of cap gain.

Since the 2 different software's are doing it the same way, I think LTCL cannot be carried forward.

Any diverging openions are truly welcome.

DIPESH (CA Final Student) (47 Points)
Replied 16 June 2011

The Act lays down following guidelines which have to be strictly adhered :

1. Losses under the head “Capital gains” cannot be set off against income under other heads of income.

2. Short-term capital loss can be set off against any capital gain (whether long-term or short-term)

3. Long-term capital loss can be set off only against long-term capital gain.

4. A long-term capital loss for a case where the long-term capital gain is exempt from tax will have no value. For example, if a share is held for a year or more and then sold at a loss, there will be no tax benefit. So this loss cannot be set off against any other income.

5. If the capital loss cannot be set off against the capital gain of that particular year then it can be carried forward for the next eight years.

6. Such loss can be carried forward only when the return is filed within time.

Ashwin (AFP) (93 Points)
Replied 16 June 2011

Dipesh,

Just to clarify things, the 10lakh LTCG is taxed at 20% and is not tax free LTCG from sale of quity fund/shares. The LTC loss is from debt fund again taxed at 20%. So point 3 and 4, you highlighted does not apply in this case.

Thanks for answering...