The markets have been so erratic and short-term investors have really felt the brunt of it. Equity is supposed to be for long term but in case you did the other wise, i.e. one among those who tried to play the market and lost money, you need to understand the tax implication on them. The losses you made there can at least bring you some tax benefit as it can be used to reduce your tax liability.
Let us understand how is that done?
But before I elaborate further I would like to repeat that this is for those who tried to play the market in the short-term and not for the stock losses one made as a long term investment.
Assume you had purchased a share at Rs 100 and expected to sell in at Rs 120 within 3 months, and invariably sold out at a loss at Rs 90. You made a loss of Rs 10 per share.
These types of losses are called as short-term capital loss. Short-term capital loss can be used to offset the gains you made in other investments.
Following are the situations where they can help you reduce your tax liability:
Short-term capital gains for shares and equity mutual funds
Profits made by selling shares or equity mutual funds within 12 months of its purchase are called as short-term capital gains. Short-term capital losses can be used to offset short-term capital gains of this nature.
Long-term gains from debt mutual funds
If you had bought debt mutual funds under the growth option made long-term capital gains then here too you can offset the gains by short-term capital loss.
Long-term gains for sale of physical gold and gold ETFs
If you had held physical gold for more than 3 years and sold it at profits you incur long-term capital gains tax. Similarly you sold gold ETF units within 1 year then you incur long-term capital gains tax. In both the cases the short-term capital loss you made in shares can be used to offset the long-term gains you made here.
Now, you must be wondering why only short-term losses can be used to offset the gains and why not long-term losses.
It is quite simple; there are no taxes on profits you make on long-term investments in shares and equity mutual funds. That means if you had made profits on shares that you sold after 12 months from the purchase date, you need not have to pay a single rupee as tax to the government. Hence only short-term capital losses on equities can be used to reduce your tax liability.
Another important thing you need to make a note on is in case your short-term capital losses is more than the gains you made in that particular financial year, you can carry the unadjusted losses to next financial years. You can carry it forward for up to 8 financial years.
So while filing your tax returns make sure you optimize your taxes my making appropriate adjustments.
[About the Author: The article has been written by Kripananda Chidambaram, Director at http://www.fintotal.com/]