Capital Loss

What is Capital Loss?

Capital Loss is a loss when the value of consideration received from the result of transfer of capital assets is less than the aggregate value of cost of acquisition & cost of improvement. In simpler words, it can be stated as the loss derived from the transfer of capital assets.

Explanation

As per the provision of income tax, if any capital assets are sold by assessee, then they need to calculate gain or Loss on assets. When the sales price of an asset is higher than the cost of acquisition of an asset, expenses for improvement of assets, and the cost of transfer of assets, then it is capital gain. If consideration doesn’t cover all this cost, then it is a capital loss. Indexation is allowed in the cost of acquisition and in the cost of improvement if an asset is a long term asset. Long-term and short-term is calculated on the basis of holding period i.e., from the date of acquisition to the date of transfer/ sale of assets.

Capital-Loss

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For eg:
Source: Capital Loss (wallstreetmojo.com)

Capital Loss Formula

Capital Loss = Purchase Price – Sale Price
ParticularsAmount
Consideration from Sales/Transfer of Assetxxx
Cost of Acquisition/Index cost of Acquisition(xxx)
Cost of Improvement(xxx)
Cost of Transfer of the Asset(xxx)
Capital Gain/Lossxxx/(xxx)

How to Calculate?

The following are the steps for calculation:

Step 1: Finds out whether assets are capital assets; In case of capital assets, it is chargeable in income from capital gain.

Step 2: Find out the nature of capital gain, whether it is short term capital gain or long term capital gain. The period of holding of assets defines the nature of capital gain. For each class of assets holding period is different for long term capital gain or Loss. For example- in the case of immovable property, 24 months for long term holding & less than this is short term holding.

Step 3: Find out the consideration as per the provision of income taxProvision Of Income TaxProvision for Income Tax is the estimated income tax for current year and is the amount that the entity might have to deposit to settle their tax liabilities. It is adjusted for the expenses allowed to be deducted according the relevant tax laws.read more.

Step 4: Calculation of the cost of acquisition or index cost of acquisition. In case the asset is a long-term asset, then for calculation of the cost of acquisition, indexation is required. In case the cost of acquisition is not identifiable, then it is required to calculate the deemed cost of acquisition.

Step 5: In case any expenses are made for the acquisition of assets or any expenses made after the acquisition of assets like improvement in assets, that expenses will be considered while calculating capital gain/Loss.

Step 6: In case any expenses are made for the transfer of assets, that expenses will also be considered in the calculation.

Step 7: The cost of acquisition or index cost of acquisition will be deducted from consideration, any expenses made for improvement will be deducted from consideration, and any expense made for the transfer of capital gain will be deducted from capital gain. If consideration is more than the cost of acquisition or index cost of acquisition, cost of improvement, and cost of transfer of assets, than it is capital gain, or if consideration is less than this, it is a capital loss.

Example

Let us understand the example in detail:

You can download this Capital Loss Excel Template here – Capital Loss Excel Template

ABC LLP has purchased land & building in 2010-11 of Rs. 30 Cr. out of which 10Cr. For land and 20 Cr. for building. ABC LLP is selling this land and building in Rs. 45 Cr. out of which 15 Cr. for land and 30 Cr. for building. ABC also holding the following quoted equity shares-

  1. 4000 shares of SI limited @ 700 per shares purchased as in March 2019
  2. 3500 shares of MR limited @450 per shares purchased as in Feb 2019
  3. 6000 shares of RI limited @600 per shares purchased as in June 2019

ABC LLP sold these shares in Dec 2019; the selling price is as follow-

  1. Shares of SI Limited @ 650 per share
  2. Shares of MR Limited @ 420 per share
  3. Shares of RI Limited @ 590 per share.

Indexation of 2010-11 is 167 and 2019-20 is 289. Calculation of capital gain/ capital loss-

Solution:

For Building

Example 1-1 (For buildings)
  • = 300000000 – 346107784.4
  • = (46107784)

For Land

Capital loss Example 1-2
  • = 150000000 – 173053892
  • = (23053892)

Calculation on Shares-

#1 – SI Limited 4000 Shares

Capital loss Example 1-3
  • = 2600000 – 2800000
  • = (200000)

#2 – MR Limited 3500 Shares

Example 1-4 (MR Limited)
  • = 1470000 – 1575000
  • = (105000)

#3 – RI Limited 6000 Shares

Example 1-5 (RI Limited Shares)
  • = 3540000 – 3600000
  • = (60000)

Now we will calculate total capital loss as shown below:

Capital loss Example 1-6
  • = (46107784) + (23053892) + (200000) + (105000) + (60000)
  • = (69526676)

As per the provision of income tax, capital losses can be set off with capital gain only. It cannot set off with any other source of income.

Short term capital gain can be set off with long term capital gain and short term capital gain. But long term capital gain can be set off with long term capital gain only.

Difference Between Capital Loss and Capital Gain

Below are a few differences:

#1 – Capital Gain

Capital gain is raised in value of capital assets or profit on the sale of capital assets. When the sale price of capital assets is higher than the purchase price of assets, it is capital gain. In the case of capital gain, it is chargeable with 20% tax

#2 – Capital Loss

It decreases the value of assets i.e., when the sale price of assets is lower than the purchase price or index cost of acquisition. Such losses can be carried forward for the next eight years.

Conclusion

It decreases in the value of capital assets; at the time of sale of capital assets, if the consideration received is lower than the cost of acquisition, expenses for the transfer of assets, etc. then this is a capital loss.  It can be set off with capital gain only. Short term and long term loss are defined through the period of holding of an asset.

This has been a guide to what is a capital loss and definition. Here we discuss the formula and calculation of capital loss along with an example. You can learn more about financing from the following articles –

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