For the purpose of tax computation of total income of an individual, all incomes are classified under five heads, under the Income Tax Act: salary, income from house property, income from business or profession, capital gains and income from other sources. The total income under all these five heads of income are added and after allowing deductions the total income tax is calculated based on the tax slabs.
However, tax laws allow setting off of losses against gains in the same category, based on different criteria. If an income is tax-exempt, it however cannot be adjusted against any loss from an income that is taxable. For tax computation, profit or losses in shares are clubbed under the head of capital gains.
If an investor has held shares for less than 12 months from the date of buying, then the resulting loss on its transaction on stock exchanges, if any, is termed as short-term capital loss (STCL).
This loss can be adjusted against the short-term capital gain (STCG) or long-term capital gain (LTCG) from shares, if any, thus lowering the tax outgo. Short-term capital gains from equities are taxed at 15 per cent. (If an investor has held shares for more than 12 months, then the resulting gain/loss is termed long-term capital gain/loss.)
If the short-term loss cannot be set off in the same fiscal, then the balance can be carried forward to subsequent eight years. In each of these, the said short-term losses can be set-off against short-term capital gain (STCG) or long-term capital gain, if any.
However, long-term capital losses on shares can only be set off against long-term capital gains, if any. Further, any long-term capital losses that cannot be set off against long-term capital gains arising in the same fiscal can be carried forward to subsequent eight years.