Active Stocks
Fri Jun 14 2024 15:58:47
  1. HDFC Bank share price
  2. 1,597.45 1.05%
  1. State Bank Of India share price
  2. 840.20 -0.44%
  1. Tata Steel share price
  2. 183.05 0.30%
  1. ICICI Bank share price
  2. 1,105.10 -0.20%
  1. Kotak Mahindra Bank share price
  2. 1,717.00 -0.54%
Business News/ Markets / How to set off capital losses in stock market to reduce your income tax liability?
BackBack

How to set off capital losses in stock market to reduce your income tax liability?

The Income Tax Act contains a number of regulations and legislation that govern capital losses

Shareholders can counterbalance stock market losses against gains and carry forward any residual losses to subsequent fiscal years to lower their tax liability. Premium
Shareholders can counterbalance stock market losses against gains and carry forward any residual losses to subsequent fiscal years to lower their tax liability.

Stock portfolios can experience capital gains or losses based on market performance and are subject to market risk. Most individuals are unaware of how this income is taxed when it comes to buying and selling shares, but it is crucial to realise that the gain or loss from the sale of stock shares falls under the umbrella of "Capital Gains."

The Income Tax Act contains a number of regulations and legislation that govern capital losses. As a result, taxpayers need to become familiar with strategies for minimising their tax liabilities and offsetting losses in their Income Tax Returns (ITR). Shareholders can offset market losses against earnings and roll over any remaining losses to subsequent fiscal years to reduce their tax obligations.

Amit Gupta, MD, SAG Infotech said shareholders must understand that short- or long-term capital gains from the sale of equity assets can outweigh any short- or long-term capital losses resulting from the selling of equity shares. The remainder of a shareholder's capital loss may be offset against any short- or long-term capital gains under the category of "Other sources of income" under section 35AD if the entire loss cannot be offset during the same assessment year.

Long-term capital gains

According to Siddharth Maurya, Resource Specialist, Expertise Real-Estate and Fund Management, gains or losses made from stock market investments are categorised under the Income Tax Rules as capital gains/losses, business income/loss, and speculative income/loss. Based on these types of transactions, any income from stock market deals may be taxed as capital gains on investment or as profits and gains from a business or profession.

“In the event of listed share transactions exceeding 1,00,000 under Section 112A, long-term capital gains are taxed at a rate of 10% without indexation benefits if the holding period for long-term capital gain or loss exceeds 12 months. On the other hand, long-term capital losses can be offset for up to eight years against long-term capital gains," said Amit Gupta.

Tax-loss harvesting

Tax-loss harvesting is a strategy used by investors to reduce their tax liability by selling a stock/security that has incurred a loss. This process helps investors offset taxes on any capital gains income subject to taxation, said Reema Sonkar, Founder Director, Milestone Advisory Pvt. Ltd

LTCG (Long Term Capital Gain) will be adjusted against long-term loss only while STCG (Short Term Capital Gain) can be set off against both long-term capital loss and short-term capital loss.

Let us understand it with an example:

1) If an individual earns 2 lakhs in Short-Term Capital Gains (STCG) this year, he/she must pay 15% of this amount as taxes, which amounts to 30,000.

2) Additionally, if the individual holds stocks with an unrealized loss of 1,20,000, he/she can sell these stocks to reduce their net STCG to 80,000. This would require paying 15% of 80,000, which amounts to 12,000 in taxes, resulting in a tax savings of 18,000.

3) This process of selling stocks to harvest losses and save on taxes is known as tax-loss harvesting

Shareholders can counterbalance stock market losses against gains and carry forward any residual losses to subsequent fiscal years to lower their tax liability. Capital losses incurred from the sale of shares or mutual funds cannot be reported against the head salary income.

"The taxpayer must submit their ITR prior to the Section 139 (1) deadline in order to extend the loss carryforward period to the next eight assessment years. Even if the income/loss return for the year the loss was incurred is not filed on or before the return filing date prescribed in section 139(1), the Income Tax Act authorises loss carryforward under the category of “Profits and profits of business or profession," added Amit Gupta.

 

3.6 Crore Indians visited in a single day choosing us as India's undisputed platform for General Election Results. Explore the latest updates here!

ABOUT THE AUTHOR
Sangeeta Ojha
A business media enthusiast. Writes on personal finance, business and banking.
Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 07 Apr 2023, 10:14 AM IST
Next Story footLogo
Recommended For You
GENIE RECOMMENDS

Get the best recommendations on Stocks, Mutual Funds and more based on your Risk profile!

Let’s get started