The Hindu Business Line : Book losses in equity to earn tax breaks

The loss advantage
Book short-term capital losses.
Set it off against
short-term, long-term capital gains.
Carry STCL to eight assessment years.
Buy next financial year, based on risk appetite.
Use window to rejig portfolio.
Strategy can be used by MF investors also.

Bless the bad bargains: Investment losses made during the year can be used to offset capital gains or carried forward for eight assessment years.

Suresh Parthasarathy

Investors who anticipated good gains from their equity or mutual fund investments may have gotten a rude shock this financial year, with their stocks or funds falling sharply in value.

Well, such investors can still make the best of a bad bargain by booking their short-term capital losses by March 31 and using that to earn tax breaks.

Current tax laws allow you to set off a short-term capital loss against any short-term capital gains or long-term capital gains. If you have neither in the current year, you can carry forward the loss for a period of eight assessment years immediately succeeding the assessment year during which you have incurred the loss. Therefore, the short-term capital losses incurred this year can actually be used to reduce taxes on gains next year.

Here’s an illustration of how this works. If you have purchased stocks to the tune of Rs 3 lakh this financial year and have lost 50 per cent of the value (losses could have been even higher for mid- and small-cap stocks), it makes sense – from a tax perspective – to book these losses by selling your shares in the market, irrespective of whether you are a long-term or a short-term investor.

You can even buy back the shares in the first week of April, to gain from any future upside.

On the above portfolio, you will book a loss of Rs 1.5 lakh and the cost of brokerage works out to Rs 1,100 (0.7 per cent inclusive of STT).

You can set off this loss against any gains you have made in the last few months (you would have, if you put in fresh money in the lows of October-November).

If you are sitting on short-term gains of, say, Rs 50,000 your short-term capital gains tax at 16.995 per cent works out to Rs 8,497. If you prefer to use this strategy, the net of the costs involved in selling and buying back the shares works out to Rs 2,100 for a transaction of Rs 1.5 lakh. The effective tax saving works out to Rs 6,397.

Even if you have not invested money during the lows, you can still book a loss and use it to adjust against gains over the next eight assessment years.

The only risk involved in this transaction is that if the stock price moves up between your sell and buy dates, you may lose out on interim returns. Conservative investors can consider selling on March 31 and can buy the same stock the next trading day.

More Stories on : Stock Markets | Taxation

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page