Tax Treatment Of Long Term Capital Loss: Is It Fair And Equitable?

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: The Finance Act, 2002 has amended the law relating to setoff and carry forward of Capital Loss. However, in certain cases, the tax payable is higher than the total Capital Gains earned by a Taxpayer. Is this fair? The Law relating to Capital Gains & Losses Till assessment year 2002-2003 relevant to the accounting year ended on 31-3-2002, short term capital losses could be freely adjusted against long term capital gains and vice-versa.

Hence, an assessee would have to pay tax only on the net amount of capital gains after setting off all other losses on capital assets. However there has been a paradigm shift owing to amendment of section 70 and 74 of the act, by the Finance Act, 2002 that changed the law relating to setoff and carry forward of capital losses.

In other words, with effect from 1-4-2002 relevant to assessment year 2003-2004, internal setoff of losses amongst short term and long term capital assets is no longer freely permitted.

If an assessee has suffered a long term capital loss, then this loss can only be adjusted against long term capital gains and not against short term capital gains.

However, as per the earlier law, if an assessee had suffered a short term capital loss then, this loss could be adjusted against short term or long term capital gains. Furthermore, unfortunately this amendment has a retrospective effect and hence, would apply even to brought forward long term capital losses.

Thus, long term capital losses relating to assessment year 2002-2003 and prior to that can be setoff only against long term capital gains and not short term capital gains.

But, why has this change been made? The rationale behind this amendment seems to be to increase the taxes paid by assessees. Previously, under the old law, if an assessee has short term capital gains which is taxed at 30 per cent plus surcharge, by allowing it to be setoff against long term capital loss which is otherwise taxed at 10 per cent or 20 per cent plus surcharge in the case of long term capital gains, the final tax payable on the net short term capital gains is reduced in rupee terms.