While making losses in a volatile market may be unavoidable, one can still maximise income by accounting for losses at the time of calculating the tax liability. Short-term capital gains are taxed at higher income-tax rates than long-term capital gains. Although tax-loss selling can’t restore your losses, it can certainly soften the blow.
Under the Income-Tax Act, incomes are classified under five heads: Salary, income from house property, income from business or profession, capital gains and income from other sources. Income under all these five heads is added and, after allowing deductions, the income tax is calculated based on the tax slabs/special rates.
Tax laws allow setting-off of losses against gains in the same category, based on different criteria. But one has to remember that losses can be carried forward only if the return of income is filed within the due date. Let us see the types of losses and how they can be set off:
Losses from long-term capital assets can be adjusted against long-term capital gains only
Capital losses
Losses from short-term capital assets can be adjusted against both short-term and long-term capital gains. Losses from business/profession can be set off against all income heads other than salary.
Business losses
Losses from a speculative activity or owning/maintaining race horses can be set off only against profits under the respective heads. Also, house property losses can be set off against income from any other head, including salary in the same financial year.
Losses from share markets
Equity and equity-based mutual funds are considered long-term assets when held for at least a year. However, non-equity mutual funds are treated as long-term assets, only if held for at least three year.
Any loss you make on sale of equity stocks bought less than 12 months ago are short-term capital losses and can be adjusted against short-term capital gains as well as long-term gains. The unadjusted losses can be carried forward for up to eight financial years to be set off in subsequent years. The loss incurred on selling the equity stock bought more than 12 months ago, are long-term capital losses. Long-term capital loss on listed equities where STT is paid cannot be set off because the income is exempt. However, if you sell the shares offline without paying STT, the loss can be adjusted against a long-term capital gain.
Tool to limit your taxes
Keep a close check on your portfolio and if you are losing money on an equity holding, harvest your losses by selling within a year to book short-term capital loss to be set off with short-term capital gains made during the year or in the subsequent eight years. To keep the holdings intact, later on the equity can be repurchased. Like, a loss in the value of Security X could be sold to set off the increase in value of Security Y, thus limiting the capital gains tax liability of Security Y and, later, Security Y can be repurchased to reinstate the equity holdings.
However, one has to keep in mind that intra-day trading is considered speculative as there is no delivery of the asset and losses from speculative businesses can be adjusted against only speculative profits. But where it can be proved that the transaction was a normal business one, the loss therefrom can be treated as a non-speculative business loss/capital loss, to be set off with income from other heads in the specified manner.
Softening the blow
* Losses from business/profession can be set off against all income heads other than salary
* Losses from a speculative activity or owning/maintaining race horses can be set off only against profits under the respective heads
* House property losses can be set off against income from any other head, including salary in the same financial year
* Any loss you make on sale of equity stocks bought less than 12 months ago are short-term capital losses and can be adjusted against short-term capital gains as well as long-term gains
* The unadjusted losses can be carried forward for up to eight financial years to be set off in subsequent years
The writer is managing partner, Nangia & Co.
Inputs from Neha Malhotra