Capital Loss on NCD

Here's a detailed response on your query about capital loss on Non-Convertible Debentures (NCDs) of IL&FS:

You purchased IL&FS NCDs in 2017, maturing in 2027.
Interest was supposed to be paid annually.
From 2019, no interest has been paid, and principal repayment is uncertain.
You have essentially incurred a loss on both interest income and capital invested.
You want to know if you can set off these losses against capital gains elsewhere and under which tax provisions.

NCDs are capital assets if held as investment.
Loss on NCDs due to default or non-payment is considered a capital loss.
Non-payment of interest means loss of income, but for tax, only actual receipt/non-receipt is relevant.

Yes. Loss incurred on sale or valuation of capital assets (NCDs) can be set off against capital gains under Income Tax Act.
But this depends on type of capital loss:
- Short-Term Capital Loss (STCL): If held for less than 36 months for debt instruments like NCDs.
- Long-Term Capital Loss (LTCL): If held for more than 36 months.
For your case, holding since 2017 and considering 2019 as date of loss realization, it may be STCL or LTCL depending on exact dates.

Interest on NCDs is taxable as Income from Other Sources when received.
Non-receipt of interest means no income.
Loss of interest amount cannot be claimed as capital loss; it's treated as loss of income and cannot be set off against capital gains.
It can be claimed as loss under Income from Other Sources only if due but not received and written off (rare and complex).

You may treat the principal loss as capital loss.
Loss can be claimed in the year when the loss is crystallized, such as:
- Date of sale/write-off.
- Date when it becomes clear recovery is not possible.
In case of default, you may claim loss in the year when asset becomes worthless or written off.

Short-Term Capital Loss (STCL) can be set off against both short-term and long-term capital gains.
Long-Term Capital Loss (LTCL) can be set off only against long-term capital gains.
Unadjusted capital losses can be carried forward for 8 assessment years.

Aspect	Section/Rule	Explanation
Capital Loss on NCDs	Section 2(14), Section 48	Capital asset and computation of capital gains
Set off of Capital Loss	Section 70 and Section 74	Set off and carry forward of capital losses
Classification of capital assets	Section 2(42A)	Holding period for long-term or short-term
Interest income tax treatment	Section 56(2)(vi) and Section 2(24)	Income from other sources rules

Aspect	Tax Treatment
Principal loss on NCD	Capital loss, can be set off against capital gains
Interest loss (non-received)	Not capital loss; may not be set off against capital gains
Set off rules	STCL can set off against any capital gains; LTCL only against LTCG
Loss recognition year	When loss is crystallized/written off
Carry forward	Unadjusted loss can be carried forward for 8 years

Determine when the loss on NCD principal is crystallized (e.g., year when written off or asset declared worthless).
Compute capital loss accordingly and set off against capital gains in that year.
Keep records for IT Department scrutiny.
Interest loss is generally not allowed as capital loss but consult your CA for possible write-off as income loss.