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Calculation of profits and losses in multiple investments (discussion of set-off and carry forward)
An investor typically makes investments in different businesses. It may incur losses on some, and make profits on others. Can the losses be subtracted from the profits?
This depends on the nature of the gain or loss. The losses arising from a transfer of a capital asset (e.g. shares in this case) in India can only be set off against income under the head capital gains and not against income under any other head. A short-term capital loss can be set-off against both STCG and LTCG. However, long-term capital loss can only be set off against a LTCG.

An investor has incurred a short term loss of INR 50 lakhs on his investment in company A, and has made a long term gain of INR 80 lakhs in company B. Can the loss be set off against the gain?


Yes, a short-term capital loss can be set-off against both long-term and short-term capital gains.



An investor has incurred a long term loss of INR 40 lakhs on investment in company X, a short term loss of INR 10 lakhs on his investment in company Y and a short term gain of INR 60 lakhs in company B. How much of the loss can be set off?



The total gain here is INR 60 lakhs and the total loss is INR 50 lakhs. The net gain is INR 10 lakhs. However, note that long term capital loss can only be set off against long term capital gain. Hence, the amount of INR 40 lakhs cannot be set off against the INR 60 lakhs gain. Only the short term loss of INR 10 lakhs can be set off against the short term gain of INR 60 lakhs. Therefore, net gain will be INR 50 lakhs.

If he has made a loss in a particular year, an investor is going to be interested in a tax benefit from the next year’s gains. Are such adjustments possible?
To the extent that the losses are not absorbed in the year of transfer of the capital asset, the same may be carried forward for a period of eight assessment years after the year in which loss was incurred and can be set off against the income under the head capital gains in such subsequent years. However, the losses cannot be set-off against income from other heads, e.g. income from salary or business income.

Consider an investor which has made a loss of INR 2 crores on an investment in a software startup company in 2012. Next year, the foreign investor has generated INR 5 crore revenues from providing business consultancy services to Indian companies – of which INR 3 crores is profit. Can the loss of INR 2 crores be subtracted from the profit of INR 3 crores?



No, under Indian law, the INR 3 crore profits are treated as income from business or profession, and hence capital losses of the past year cannot be set off against this income. They can be set off in a subsequent year against other capital losses (until eight years expire).

Note: In order to avail the benefit of set-off of the capital losses, the non-resident investor would be required to file appropriate and timely tax returns in India and comply with the applicable assessment procedures.


Capital gains tax under Indian law and double taxation agreements

While the Income Tax Act prescribes the rate at which capital gains tax is applicable, relevant double taxation avoidance agreements (DTAAs) will have to be consulted for any reliefs that are available if the investor is a foreigner. For example, the India - Mauritius DTAA exempts investments from capital gains tax, which has earlier been the largest source of inbound investment into India. However, under the new General Anti-Avoidance Rule (GAAR) framework it is likely that tax authorities will disregard the DTAA if the transaction lacks substance and has been routed through Mauritius merely to avail of tax benefits. Similarly, capital gains tax is exempted in respect of investments made from a Singapore-entity into India, provided certain conditions stipulated in the DTAA are satisfied (this is known as a limitation of benefits clause), as follows:
  • If availing of tax benefit is not the primary purpose of the company
  • If the company is not a shell company, i.e. one which has negligible business operations in Singapore. A company that is listed on an Indian or Singapore stock exchange or, in case a company is unlisted, if its total annual expenditure is equal to or more than SGD 200,000 or INR 50,00,000 in the 24 months prior to the date of capital gains, it will not be considered a shell company.


These restrictions require a business to have a certain level of operations in order to be eligible to avail of the benefit. For this reason, tax authorities are less likely to question Singapore-routed transactions - a recent news article mentions why Singapore has quickly beaten Mauritius as the most popular source of foreign investment. 

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