Why does ITR2 set off long term capital loss with tax-free equity LTCG (< 1 lakh)

Published: July 9, 2022 at 6:00 am

A few days ago, Suhas made an interesting observation in the Facebook group, Asan Ideas for Wealth: “I noticed that if we carried forward LTCL (long term capital loss) from previous years then that 1L exemption is not applicable”. Why is this so? Is this an error? Let us find out.

This article was made possible thanks to the expertise and help rendered by Manmohan Sethumadhavan and is authored by Anjesh Bharatiya a 30+ taxman by profession and a Chemical Engineer by education.

If you have earned Long Term Capital Gains (LTCG) you are supposed to file your return in ITR-2  if you are salaried or in ITR-3 if you are a businessman or professional. As you may know, LTCG from the sale of shares/equity mutual funds (covered under section 112A) up to Rs 1 lakh is exempt from tax. However, if you have incurred Long Term Capital Loss (LTCL) from some other avenue, there is a catch.

This LTCL is set off against the LTCG under section 112A without providing the benefit of the Rs 1 lakh exemption. You might think this is an error in the ITR-2 return filing utility. Let’s find out more about this.

Setting off losses: You can set off losses incurred under a head of income against gains/profits from other heads subject to certain conditions. Both intra-head and inter-head set-offs are possible. The rules are tabulated below:

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Type of lossIntra Head Adjustment AllowedInter Head Adjustment Allowed
Short Term Capital Loss (STCL)Yes. Only against STCG & LTCGNo
Long Term Capital Loss (LTCL)Yes. Only against LTCGNo
Loss from House PropertyYesYes (up to Rs 2 lakh)
Loss from speculative business (Includes intraday trading in stocks)Yes. Only against gains from speculative businessNo
Loss from specified businessYes. Only against gains from specified businessNo
Other business lossesYesYes (except against salary income)

Also, losses which couldn’t be set off can be carried forward for different time limits and can be set off in the future years as per the rules laid out in the above table. Both STCL & LTCL can be carried forward for 8 years.

Setting off LTCG from shares against other LTCL

If you have earned LTCG from shares of less than Rs 1 lakh and have also incurred LTCL from some other source (like from the sale of land), you might think that the other LTCL will be set off against the LTCG from shares only after the free limit of Rs 1 lakh allowed under section 112A and you will be able to carry forward the entire LTCL for setting off in future years. But this is not how it works. Let’s understand this with an example.

1. I sold stocks of a company after 1 year and earned LTCG of Rs 44,230/- (marked in red)

2. I also sold some land and incurred an LTCL of Rs 2,00,000/- (marked in red)

3. Now, the ITR utility does not set off the LTCL after considering the Rs 1 lakh exemption under section 112A. So, the total LTCL is not Rs 2,00,000/-. Instead, the utility sets off the LTCL of Rs 2,00,000/- from the sale of land against the LTCG from the sale of shares of Rs 44,230/- even though LTCG from the of shares is exempt up to Rs 1,00,000/-. So, the total LTCL for the year is only Rs 1,55,770/- which can be carried forward to the next year.

What happened here? The exact wording of the relevant part of Section 112A is: The tax payable by the assessee on the total income referred to in sub-section (1) shall be the aggregate of—(i)   the amount of income-tax calculated on such long-term capital gains exceeding one lakh rupees at the rate of ten per cent

So, the gains of up to Rs 1 lakh under section 112A are still technically LTCG and will be set off against any other LTCL. The section does not provide any exemption up to Rs 1 lakh but only says that tax is calculated only on the portion above Rs 1 lakh. Also, if there are brought forward LTCL from previous years, they too will be set off against this LTCG under section 112A (even if the LTCG is below Rs 1 lakh). This set-off is not optional.

In summary, for people having both LTCG under section 112A and other LTCL, the benefit of Rs 1 lakh will not be available to the extent of the LTCL.  There is no glitch in the ITR 2 utility. And the LTCL will be carried forward only after setting off against the LTCG under section 112A, whatever the LTCG.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)