With the Sensex continually inching towards the psychological mark of a record 18K, more and more retail investors are being drawn to share trading because of the allure of high gains from the markets; there is a quick buck to be made here. Add the fact that long-term capital gain from transfer of shares, securities and mutual fund is exempt from taxes, and the option looks more lucrative. But, do you know how to deal with long- and short-term losses while trading in shares?
Long-term capital loss can be set off against long-term capital gain. While short-term capital loss can be set off against both short- and long-term capital gains, the point to note is that such losses only should be set off against capital gains and not any other income.
But, what do you do when you don’t have enough capital gains in a year to adjust your losses? In this case, to set off the remaining loss, the income tax law has a provision to carry the losses forward for the next eight years, immediately following the assessment year for which the loss was first computed. Both long- and short-term capital gains are separately carried forward.
To understand how to set off capital losses, it’s vital to understand the difference between various capital gains and the rates that apply. The holding period of the asset determines whether the gain is short-term or long-term. Short-term capital gain comes from transfer of assets such as shares, mutual funds or other listed securities, which are held by the assessee for a period not exceeding 12 months (36 months in the case other assets). Long-term capital gain would accrue if assets such as shares, mutual funds or other listed securities are held by the assessee for a period exceeding 12 months (36 months in the case of other assets).
Long-term capital gain resulting from the transfer of shares, securities and mutual fund is exempt from tax, provided securities transaction tax has been paid on such transfers. But where the gain is short-term, a 10% tax plus surcharge and education cess is levied. In the case of other assets, long-term capital gain is taxed at 20% in addition to surcharge and education cess; short-term capital gain invites regular tax rates.
For instance, assume you have a short-term capital loss of Rs60,000 in a year. In addition, you have a short-term capital gain of Rs10,000 and a long-term capital gain of Rs30,000. In this case, you can first set off the short-term capital loss of Rs60,000 against the short-term capital gain of Rs10,000 and then from the long-term capital gain of Rs30,000.
The remaining loss of Rs20,000 can be carried forward for the next eight years from the current assessment year. TEENA JAIN