Tax:Use losses in stocks to cut tax

Source: ET-Wealth-3Jan2011: 8 Tax Saving Secrets

Use losses in stocks to cut tax

Can you gain from the short-term losses you made on stocks? Yes, says the Income Tax Act. If you have made any long-term capital gains from sale of property, gold or debt funds, you can set them off against short-term capital losses made on stocks and bring down your tax liability. “Short term capital losses can be set off against both short-term capital gains as well as taxable long-term capital gains,” says Sandeep Shanbhag, director of Wonderland Consultants, a Mumbai-based tax planning and financial consultancy. This can be especially useful for someone who has booked profits on gold ETFs and physical gold this year. Suppose you have sold a property and made a long-term capital gain of Rs 30 lakh after indexation.

At 20%, the tax payable on this long-term capital gain is Rs 6 lakh. However, if you have also sold some junk stocks during the year and made a short-term loss of Rs 3 lakh, you can set this off against the gains from the property. Then the gain from the property will get reduced to only Rs 27 lakh and the tax payable will be Rs 5.4 lakh. However, the law makes a distinction here. One cannot set off short-term gains from stocks against long-term capital losses from the other assets. “Long term capital losses can only be set off against taxable long-term capital gains,” says Shanbhag.

How much tax can you save: Setting off a short-term loss of Rs 3 lakh against long-term gains can help you save Rs 60,000.

Proof required: Keep record of your equity trading account statement with details of the transactions that resulted in losses.

Highlights - Ajay

Short Term Capital Losses <-> STCGains

STCL <-> Taxable LTCG

STCG can't be offset against LTCL

LTCL <-> Taxable LTCG