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Mar 18

Setting of Capital gain or loss.

 

If you got good gains from your equity or mutual fund investments this financial year or sitting on losses of earlier years, you can set off this year’s profit by selling your investment before the year-end.

 

Otherwise,  investors sitting on loss can still make the best of a bad bargain by booking  short-term capital losses (STCL) by March 31 and can create short-term loss. Again, if you buy in April 2014 and  the market  delivers handsome gains next year,you can use the STCL to set off  profits 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 bought stocks  for Rs 3 lakh this financial year and  lost half the value,  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 securities transaction tax).

You can set off this loss against any gains  you make in the next few months.

If you are sitting on short-term gains of, say, Rs 50,000, your short-term capital gains tax at 15.45 per cent works out to Rs 7725. If you prefer to use this strategy, the net  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 5625..

Even if you have not invested money during the lows, but still on 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.

For any clarifications, write to me, Suresh, at info@myassetsconsolidation.com

suresh@myassetsconsolidation.com.

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