How to Get Tax Gains from Your Losses in Shares

For the purpose of tax computation of total income of an individual, all incomes are classified under five heads, under the Income Tax Act: salary, income from house property, income from business or profession, capital gains and income from other sources. The total income under all these five heads of income are added and after allowing deductions the total income tax is calculated based on the tax slabs.

However, tax laws allow setting off of losses against gains in the same category, based on different criteria. If an income is tax-exempt, it however cannot be adjusted against any loss from an income that is taxable. For tax computation, profit or losses in shares are clubbed under the head of capital gains.

If an investor has held shares for less than 12 months from the date of buying, then the resulting loss on its transaction on stock exchanges, if any, is termed as short-term capital loss (STCL).

This loss can be adjusted against the short-term capital gain (STCG) or long-term capital gain (LTCG) from shares, if any, thus lowering the tax outgo. Short-term capital gains from equities are taxed at 15 per cent. (If an investor has held shares for more than 12 months, then the resulting gain/loss is termed long-term capital gain/loss.)

If the short-term loss cannot be set off in the same fiscal, then the balance can be carried forward to subsequent eight years. In each of these, the said short-term losses can be set-off against short-term capital gain (STCG) or long-term capital gain, if any.

To reduce outgo, many investors set off gains made from equities in the fiscal against losses occurred in same year or previous year. They book losses, if any, on existing holdings and then later repurchase the stock to keep their holdings intact.

For example, an investor has already booked short-term profit (by selling within 12 months) of Rs 10,000 in some stocks. At the same time, the investor is sitting on un-realized loss of Rs 4,000 in some other stocks.

In that case, the investor has to pay short-term capital gains tax at 15 per cent on Rs 10,000 profit. To reduce short-term capital gains tax liability, the investor can sell the stock on which he is incurring Rs 4,000 of losses. In that case, the investor's has to pay tax on Rs 6,000 (Rs 10,000 - Rs 4,000), not Rs 10,000. To keep his holding intact, the investor can later repurchase the stock.

However, long-term capital losses on shares can only be set off against long-term capital gains, if any. Further, any long-term capital losses that cannot be set off against long-term capital gains arising in the same fiscal can be carried forward to subsequent eight years.

Disclaimer: "Investors are advised to make their own assessment before acting on the information."