A capital loss is a decrease in the value of an investment. A capital loss arises when the cost price is higher than the selling price. It is the difference between the sale price and the purchase price of an asset. A capital loss is the loss incurred when a capital asset decreases in value. The capital asset could be an investment or real estate, etc.
This loss is not realized until the asset is sold for a price that is lower than the purchase price.
The formula for capital loss is:
Capital Loss= Purchase Price - Sale Price
For instance, if an investor bought a house for INR 20,00,000 and sold the house five years later for INR 15,00,000, the investor realizes a capital loss of INR 5,00,000.
The nature of your loss depends on time for which you have held the capital asset. Some are short-term losses and some are long term. Long-term losses are when you hold an asset for more than 2 years and it is calculated after indexing the cost of purchase.
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When a taxpayer has incurred a capital loss, as per the Income Tax act, you are allowed to set off or carry forward the losses. Setting off losses means that a taxpayer can adjust current year losses against current year’s income. This can only be allowed to be set off against income from capital gains. These cannot be set off against any other income.
Capital losses can be carried forward for a period of right years
Long-term capital losses can only be set off against long term capital gains
Short term capital losses can be set off against long term capital gains as well as short term capital gains
Setting off losses in the Income Tax Returns