Taxpayers frequently realize capital gains, and sometimes they also incur capital losses. Expositional balance against these effects, the Income Tax Act contains methods that render these provisions reasonable. One of the key provisions in this connection is Section 74 of Income Tax Act, 1961.
This part is under the general rules on set-off and carry forward of losses and specifically concerns capital losses. It is a beneficial provision in the Income Tax Act which prevents loss to the assessee who loses an amount in one year but wants to set it off against income of later years.
What is Section 74 in the Income Tax Act?
Take me directly to Section 74, Income-tax Act Law: Section 74 of the Income Tax Act can help set off & carry forward capital losses. Put another way, when you lose money from selling a capital asset, you don’t lose the value of that loss. Instead, you can use it to also offset future capital gains and reduce your taxable income.
This provision lets the taxpayers smooth out upswings & downswings in investments over years, which is how fair & equitable taxation should work. It acknowledges that capital gains and losses will not always be realized in the exact same financial year.
Key Provisions of Section 74
Short-term capital loss (STCL)
- May be offset against short- or long-term capital gains.
- If not entirely offset in the same year, it is carriable forward for a period of eight assessment years.
Long-term capital loss (LTCL)
- Can be offset only against long-term capital gains.
- Shall not be adjustable against short-term capital gains."
- And carry forward period is 8 remaining years.
These regulations see to it that the nature of losses remains intact.
Also Read: Carry Forward of Losses in Case of Amalgamation or Merger
Section 74 Example in Practice
Suppose Mr. Sharma, an investor suffer a short-term capital loss of ₹2 lakh in FY 2024–25. During the year, he makes a long-term capital gain of ₹3 lakh.
He will be able to set off the ₹2 lakh short-term capital loss against the ₹3 lakh long-term capital gain.
This brings down his taxable capital gain to ₹1 lakh.
If, on the other hand, he had a long-term capital loss, it would be applicable to offset long-term capital gains only during the same year or carried forward for eight years.
Carry Forward Rules – The 8 Year Window
Section 74 allows an eight-year carry forward of STCL & LTCL.
This means if you cannot adjust your losses in the same financial year, then you can carry forward & adjust it against eligible capital gains over next 8 years.
But there is a catch: The loss must be reported in the Income Tax Return (ITR) by due date under Section 139(1). The taxpayer will have no right of the losses for carryover, if the return is not filed in time.
Why Section 74 is Important?
- Stimulates investment – Investors are more willing to assume risk when losses can be carried to future years.
- Offers tax relief – It eliminates double taxation and makes sure that taxpayers aren’t penalized by the changing markets.
- Encourages equitable behaviour – Gains & losses are recognised consistently across financial years.
- Facilitates tax planning – Investors can time the sale of assets in a way that reduces their tax outgo.
Also Read: Carry Forward and Set Off of Losses in the Case of Certain Companies
Section 74 vs Section 73
- Capital losses are covered by Section 74.
- Speculative business losses are covered under Section 73.
- As per Section 73, speculation losses may only be set off against speculative profits.
- Under Section 74, losses are specifically classified as short-term capital loss & long-term capital loss with separate set-off provisions.
Both are important for anyone doing share trading.
Judicial Pronouncements on Section 74
The courts themselves have read Section 74 as shielding taxpayer rights.
- CIT vs. Manmohan Das (1966) – Carry forward permissible if losses are determined & declared in the Assessment Year itself.
- B.C. Srinivasa Setty case – Explained the relationship between the capital asset and its treatment with reference to profit & loss.
- Subbu Chetty Vs. Their Legal Representatives of Appukutti & Others – Applied interpretation under excluded income.
These decisions emphasize on compliance and timely filing for availing benefits.
Special Provision as to Income-Tax
The expression special provision as to income tax is appropriately applied to Section 74. Unlike non-discriminatory set-off provisions, Section 74 is designed precisely for the vicissitudes of financial markets.
It guarantees that investors can spread their tax liability over years, not getting punished in a single bad year.
That’s why financial planners & tax specialists always consider Section 74 before recommending any sale of assets.
Also Read: Set-Off of Refunds Against Tax Remaining Payable
Practical Guidance for Taxpayers
- Keep good records of your purchase and sale of assets.
- File the ITR within the time limit to claim carrying forward & set-off of losses."
- Track carried forward losses from year to year.
- Seek professional advice for effective capital gains tax planning.
Conclusion
Section 74 in The Income Tax Act, 1961 fairly enables short-term and long-term capital losses to be set off and carried forward for up to eight years without suffering a penalty from market volatility.
This provision is both a respite & an opportunity. It permits tax planning, while maintaining long-term equity in taxation of capital gains.
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