If your financial year involved buying or selling assets, understanding how to correctly report capital gains or losses in your Income Tax Return (ITR) is paramount. While a tax advisor can guide you, a basic understanding of these concepts will empower you to manage your taxes effectively.
What is a Capital Asset?
As per Section 2(14) of the Income Tax Act, 1961, a "Capital Asset" is broadly defined to include "any kind of property held by an assessee, whether or not connected with business or profession." This wide definition covers everything from shares, mutual funds, and real estate to gold, and even certain intangible assets like patents. The origin of acquisition doesn't change its status; even if an asset is acquired with tax-exempt income, it remains a capital asset.
Holding period matters
Generally, an asset held for more than 36 months immediately preceding its transfer is considered long-term. However, there are some exceptions, though.
For listed equity shares, units of equity-oriented mutual funds, listed debentures, Government Securities, Units of UTI, and zero-coupon bonds, the holding period is 12 months for gains to be eligible for long-term capital gains.
For unlisted shares and immovable property (land or building or both), the threshold is 24 months. This period for immovable property was reduced from 36 months with effect from AY2018-19.
What constitutes a "transfer" or sale?
While "transfer" typically implies a sale, Section 2(47) of the Income Tax Act, 1961 provides an inclusive definition, encompassing a broader range of transactions that trigger capital gains tax. These include sale, exchange, or relinquishment of the asset; extinguishment of any rights in relation to a capital asset; compulsory acquisition of an asset; maturity or redemption of a Zero Coupon Bonds; allowing possession of immovable properties to the buyer in part performance of a contract (as per Section 53A of the Transfer of Property Act, 1882); any transaction that effectively transfers or enables the enjoyment of immovable property, and disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever.
ITR form and documents
If your income includes capital gains, you will likely need to file ITR-2 or ITR-3. For capital gains transactions, especially from shares, you'll require a summary or profit/loss statement from your broker. For mutual funds, consolidated capital gain statements from CAMs and KFintech are essential.
For the capital gains/losses from equity shares, you can check with your broker for a capital gain statement. For the sale of Virtual Digital Assets, you can get transaction report or Profit and Loss report from respective exchanges.
For immovable property, sale and purchase deeds, details of improvement costs, and transfer expenses are needed. Additionally, you'll need standard documents like your PAN, Aadhaar, bank account details, and Form 26AS.
Setting off and carrying forward capital losses
Capital losses can only be set off against capital gains. You cannot set off capital losses against income from other heads like salary or house property.
Short-Term Capital Loss (STCL) can be set off against both Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG).
Long-Term Capital Loss (LTCL) can only be set off against Long-Term Capital Gains (LTCG).
If your capital losses cannot be fully set off in the current financial year, both STCL and LTCL can be carried forward for up to eight assessment years immediately succeeding the year in which the loss was incurred.
Crucial condition for carry forward
To avail the benefit of carrying forward losses, it is mandatory to file your Income Tax Return for the year in which the loss was incurred on or before the due date as prescribed under Section 139(1) of the Income Tax Act. Failure to do so will result in the forfeiture of your right to carry forward these losses.