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In a rising market scenario, most investors plan for the taxation of gains from their equity investments. This basic idea is to ensure that gains are taxed at a lowest rate. According to tax laws, if an investor holds shares for over a year, there is no tax on gains.
However, when it comes to losses, many investors lose the plot because they think that since there are no taxes on gains, they cannot take advantage of losses. But this could be wrong. In case of capital losses, there are situations were they can set it off against profits in other segments. Let us look at a few situations to understand this.
Say an investor books a loss from equities by selling at a price that is lower than the purchase price in less than a year. For instance, 500 shares of a company are bought at Rs 50 a share and 200 out of these are sold at Rs 40 a share, then there is a loss for you. The loss is on account of the sale of the 200 shares and is Rs 2,000 (purchase price Rs 10,000 – sale price Rs 8,000). Though you have another 300 shares remaining to be sold, but until you have actually sold at a lower price and booked losses, there is no real loss.
Also, the loss has to be seen in conjunction with the period for which the shares have been held. This is important because the investor will be able to classify the loss properly, which will impact the nature of the loss and its effect on the tax. If the shares have been held for a period of less than 12 months, the nature of the loss then is a short term. Conversely, if the capital loss is for more than 12 months, it will come under long-term capital loss. Both these types of losses have a separate impact as far as the taxation aspect is concerned.
In case of a long-term capital loss for a share that is sold on the stock exchange, there is no facility available for a set off against any type of capital gain. This means that the loss has to be ignored for the purpose of tax calculation.
For instance, an investor has long-term capital gains of Rs 40,000, a short-term capital gain of Rs 20,000 and, at the same time, a long-term capital loss of Rs 25,000.
In such a situation, there is zero rate of tax on the long-term capital gain and a 15 per cent tax rate on the short-term capital gain of Rs 20,000, while the long-term capital loss has to be ignored.
In other words, there is a net tax of Rs 3,500 on capital gains.
Also, it is important to remember that along-term capital loss on a share that is sold through any route other than a stock exchange can be set off only against taxable long-term capital gains. If the entire loss cannot be set off in the current period, it can be carried forward for a period of 8 years.
The situation is different as far as the short-term capital loss is concerned. This short-term capital loss can be adjusted against short- term capital gains and even along-term capital gain. Consider the case, where an investor has a longterm capital gain of Rs 25,000, a short-term capital gain of Rs 50,000 and a short-term capital loss of Rs 30,000.
In such a case, there is a favourable position as far as the investor is concerned because there is a zero tax on the long-term capital gains, while in case of the short-term capital gains, only the net figure of Rs 20,000 will be taxed at the applicable rate of 15 per cent. This reduces the tax burden on the individual The ideal situation is where investors have only long-term holdings that are sold on the stock exchange after paying securities transaction tax. This would help them avoid any taxation on gains.
Investor is looking to exit an investment in the short term, any loss will ensure that there is some relief available.
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