How to file an ITR and how to deduct capital losses or report income from capital gains

 How to file an ITR and how to deduct capital losses or report income from capital gains

Unless they have profits or losses that are taxed under the head of business income, taxpayers who have gains or losses from capital assets normally need to submit ITR-2. Taxpayers should submit ITR-3 in certain circumstances. Those that choose presumed taxation may submit Form ITR-4.

Learn how to submit your income tax returns (ITR) for the financial year 2022–2023 (assessment year 2023–24) to report income from capital gains on the sale of stocks, mutual funds, property, and other items.

In the fiscal year 2022–2023, if you had sold shares, mutual funds, jewellery, real estate, etc., you may have had investment gains or losses. Make sure you appropriately disclose it when As you file your income tax return (ITR) this month, be sure to correctly report it.

Keep in mind that capital gains and losses are taxed differently, and you must choose certain ITR forms in order to file your returns. Let's explore capital assets, how profits and losses from transactions in capital assets are treated, and the relevant ITR forms.

What are assets in capital?

According to income tax regulations, a variety of properties owned by an assessee are regarded as capital assets, regardless of whether they are related to the assessee's trade or profession. This includes real estate such as homes, businesses, and apartments as well as financial investments in securities like stocks, mutual funds, and gold bonds and other assets.

Capital assets also include things like jewellery, priceless jewels, decorations made of precious metals like silver, gold, or platinum, archaeological collections, sketches, paintings, sculptures, or any other type of artwork, even if utilised for private use.

Long-term and short-term capital gains: their definitions

Long-term capital assets (LTCAs) are defined as assets held for longer than 36 months prior to transfer. There are, however, some exclusions for particular assets. For instance, the holding duration must be 12 months or more to be recognised as LTCA for assets listed on major stock exchanges, units of equity-oriented mutual funds, listed assets like deeds of and sovereign debt, and zero-coupon bonds.

If a corporation has unlisted shares and the holding term is 24 months or more, the shares are deemed LTCA. The holding time for immovable property (land or a structure) has been lowered from 36 months to 24 months as of the Assessment Year 2018–19.

Different assets are treated differently in terms of gains and tax rates. Depending on how they were transferred, capital asset gains might occasionally take several forms. For instance, the recipient of the designated property would be liable for taxation under section 56(2)(x) of the IT Act if the property was transferred without consideration or for insufficient consideration.

Furthermore, "taxpayers engaged in intraday trading of shares and securities, futures and option trading, or both, should declare the gains or losses from such trading activities under the category of business income. Similar to this, Sudhakar Sethuraman stated, taxpayers who deal considerably in shares and securities are permitted to categorise revenue from such trading activities under business income.

Capital loss set-off and carry-forward

Income tax laws prohibit adjusting capital asset transaction losses against wage, company, or professional income in order to lower net income and tax obligations.

"Taxpayers need to keep in mind that the IT Act fails to enable loss under the head "capital gains" to be offset against income derived from various heads," said Suresh Surana, founder, RSM India.

On the other hand, "capital loss generated by one capital asset can be set off by losses arising from different capital asset under to certain conditions," stated Surana.

According to these terms are refers to "Short-term capital losses may be offset by short-term or long-term capital profits. Only long-term capital gains can offset long-term capital losses, he can said. However, non-fungible tokens (NFTs) and virtual digital assets (VDAs) like cryptocurrencies are handled differently when it comes to capital losses. "No capital losses can be adjusted against gains from VDAs, nor can any capital losses resulting from such VDAs be offset against any other capital gains," stated Surana.

You have the choice to carry over long-term capital losses to offset against prospective profits in subsequent years if you have suffered long-term capital losses than cannot be offset against income in the same year. 

For eight years immediately after the year in which the loss is incurred, capital losses that cannot be offset during the relevant financial year may be carried forward, according to Surana.

As a result, you may employ the losses efficiently and gradually lower your overall tax obligation. But in order you must complete a critical criteria, which is to file your tax return before the deadline, which is July 31 of the assessment year every year.

fundamental exclusions and deductions

The availability of allowances and deductions, in addition to balancing losses against gains, minimises the tax obligation on income. Long-term capital gains (LTCG) can still be exempted from taxes, but it may not be claim the standard deductions against this kind of income.

The basic exemption threshold is the amount of income below which a person is exempt from paying any taxes. For the fiscal year 2022–2023, the basic exemption threshold for residents under the age of 60 is Rs. 2.5 lakh; for residents who are 60 years of age or above but under 80 years, the threshold is Rs. 3,000,000.

The exemption cap for residents who are 80 years of age or above is Rs 5,00,000. The exemption limit for non-residents is Rs. 2,50,000 regardless of the person's age, and it is also Rs. 2,50,000 for Hindu Undivided Families (HUF).

Another thing to keep in mind is that you can change the basic exemption limit for LTCG, but you can only do so after changing other income. To put it another way, the exemption limit must first be applied to all income other than LTCG before the remaining limit applied to LTCG.

It is significant to note that LTCG cannot be used as a deduction under sections 80C through 80U. Therefore, investments made in public provident fund, equity-linked savings plans, life insurance, health insurance, NPS, and other qualified deductions for salary or company income cannot be claimed against LTCG.

By reinvesting the gains, you may be able to minimise your tax obligation on LTCG or even completely avoid paying taxes in some circumstances. By reinvesting the gains within the predetermined timeframe, for instance, you can reduce your tax liability if you sell a residential property and get LTCG. You may do this by making an investment in 54EC bonds or by getting a new house. Find out more here:

Which ITR form should I choose?

Depending on the source and degree of income, there are many ITR form kinds available. "Generally, taxpayers who have capital asset gains or losses must complete Form ITR-2, unless they also have gains or losses that must be reported under the heading of business income. In this situation, taxpayers must file ITR 3, while those who choose presumptive taxation can only file ITR 4.

A return must be filed in the proper ITR form; otherwise, it will be invalid  as having not been filed at all.

Things to consider before filing a return

When submitting an ITR, it is essential to declare capital asset income correctly and completely. According to Sethuraman, one of the important factors to take into account when submitting an ITR with income from capital gains is properly classifying gains or losses as long-term or short-term.

Additionally, he stated that in order to calculate interest for late payment of advance taxes, gains must be reported on a quarterly basis. Therefore, if you had any capital gains during the first quarter of the financial year but had not paid any advance tax, the unpaid tax would have accrued interest on a monthly basis.

Additionally, bear in mind that there have been several changes to how capital gains from various assets are calculated and taxed, so keep particularly in the case of LTCG. For example, according to Sethuraman, "taxpayers holding holdings on or before January 31, 2018, must report long-term investment gains secure wise until they arrive at the fair market value of the asset as on January 31, 2018, for the purpose of paying capital gains."