When any loss is incurred on sale of any fixed assets or investments then it will be called as capital loss. The capital loss is divided into two parts:-

(i) Short Term Capital Loss:- When the shares of any company or units of any mutual funds are sold or transferred before twelve months from the date of purchase and any loss is incurred on the sale, that is called short term capital loss. In case of assets other than shares or units of mutual funds, are sold before the expiry of 36 months from the date of purchase of assets and any loss is incurred on sale then it will be treated as short term capital loss.

For Example: M/s ABC Limited purchased a plot on 25.8.15 for Rupees 15 lac and the same plot was sold on 12.10.16 for Rupees 14 lac. In this case, there is a loss of Rupees one lac. This loss shall be treated as short term capital loss since the holding period of plot is less than 36 months.

(ii) Long Term Capital Loss:- On the contrary of the short term capital loss, if the shares and units are sold after the expiry of 12 months from the date of purchase and other assets are sold after the expiry of the 36 months and any loss incurred on the sale of the asset, will be called as long term capital loss.

For example M/s  ABC Limited invested Rupees 5 lac in mutual funds on 10.12.14 and the same units sold on 10.03.16 for Rupees 4 lac. The loss of Rupees one lac shall be treated as Long term capital loss since the holding period of mutual funds units is more than 12 months.

Note: The assets on which the depreciation is charged and if these assets are sold for the value less than written down value of the assets, then the loss on the sale of these assets will be treated as short term capital loss and will be treated as business loss.

For example: M/s ABC Limited purchased a machinery on 01.04.14 for Rupees five lac. The depreciation was charged every year and the same was debited in profit and loss account at the time of finalization of accounts. on 05.12.16, the machinery was sold at a loss of Rupees fifty thousand, taking into consideration the depreciated value of machinery. In this case this loss shall be shown in debit side of profit and loss account and can not be treated as short term capital loss.

Accounting Treatment of Capital Loss

 Capital loss is never shown in profit and loss account. It is always shown separately while calculation of gross income for income tax purpose or any other purpose.

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