Sold your Mutual Fund investment at a loss? Here is how to offset the loss to save tax

By: |
October 12, 2020 10:13 PM

If you have suffered such a loss on redemption of your MF investments, here is how you may offset it to minimise your capital gains tax.

mutual fund, MF, long-term capital gain, LTCG, short-term capital gain, STCG, long-term capital loss, equities, equity-oriented fund, capital gain tax, carry forward of capital loss, how to offset capital loss, income tax return, ITRCarry forward of LTCL is allowed only if the Income Tax Return (ITR) is filed in the year of incurring the capital loss.

Mutual Fund (MF) investments – especially those made in equity-oriented MF schemes – are long-term investments, which allow an investor to monitor the market conditions 2-3 years before reaching the goal to maximise gains by liquidating the investments when the market is up.

However, currently the market situation is a peculiar one, with broader markets at a subdued level for about five years and a handful of stocks are driving the indices – e.g. Sensex and Nifty.

Due to the prolonged stretch of subdued returns, an investor may have to sell his/her investment / part of investment at a loss to meet a long-term goal.

If you have suffered such a loss on redemption of your MF investments, here is how you may offset it to minimise your capital gains tax.

Categorisation of Capital Gain/Loss

If an equity-oriented MF scheme is redeemed within 1 year from the date of investment, any gain/loss from the redemption is considered as short-term capital gain (STCG) / short-term capital loss (STCL). On the other hand, the gain/loss from redemption after a holding period of over 1 year is considered as long-term capital gain (LTCG) / long-term capital loss (LTCL).

Setting off of Capital Loss

The short-term capital loss (STCL) may be set off against both short-term capital gain (STCG) and long-term capital gain (LTCG).

However, long-term capital loss (LTCL) may be set off against long-term capital gain (LTCG) only.

Carry Forward of Capital Loss

Before LTCG from equities and equity-oriented MFs were made taxable, the LTCL on such financial assets was treated as dead loss, as such losses can’t be used to set off LTCG as long-term gains from sale of these assets were tax-free.

But after LTCG from equities and equity-oriented MFs was made taxable in the Union Budget 2018, LTCL may now be set off against such LTCG and may also be carried forward for eight consecutive financial years for offsetting purpose.

Benefit

Currently 10 per cent capital gain tax is levied on LTCG in excess of Rs 1 lakh in a financial year (FY) from total redemption of equities and equity-oriented MFs in that FY. So, by carrying forward LTCL, the amount of LTCG may be reduced in any of next 8 years, till the LTCL gets exhausted.

However, carry forward of LTCL is allowed only if the Income Tax Return (ITR) is filed in the year of incurring the capital loss.

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