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5/30/2014 How to adjust, reduce & avoid capital gains tax - Economic Times 1/4
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How to adjust, reduce & avoid capital
gains tax
Narendra Nathan, ET Bureau Mar 18, 2014, 08.00AM IST
Mangal Dutt Sharma does not get overly perturbed when his
stocks take a beating. "If possible, I book short-term losses
and adjust them against other capital gains," says the
Faridabad-based retired PSU manager. In 2008, when the
capital markets were crumbling, Sharma booked short-term
losses of up to Rs 1 lakh. Over the past six years, he has
adjusted those losses against short-term capital gains from
stocks and mutual funds. It's a simple strategy that smart
taxpayers like Sharma use to cut their capital gains tax.
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Certain losses from the sale of capital assets can be adjusted against gains from other assets. If the entire
loss cannot be adjusted in one year, the taxpayer can carry forward the balance for up to eight financial
years. The average taxpayer, however, is blissfully unaware of the provisions relating to capital losses.
Meet Abhay Kukreja, an Agra-based sales manager in an FMCG company, who also dabbles in stocks. Over
the past 6-7 years, Kukreja's luck with stocks has been a rollercoaster ride. Though he diligently paid 15 per
cent tax on the short-term gains from stocks during good years, he quietly absorbed the losses incurred
during the down years. What's more, he has also paid tax on other capital gains from FMPs and gold funds
during the past 3-4 years.
"If only I had known that the losses from stocks could be carried forward to subsequent years, I would have
saved a lot of tax," he says.
Our cover story this week is a primer on how you can adjust, reduce and avoid capital gains tax. The rate of
tax on capital gains depends on the nature of the asset and the holding period (see graphic).
Book short-term losses before March; save tax
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(Investors have a two-week…)
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In the first section, we look at how an investor can adjust his gains against losses. The effective rate of
capital gains tax also depends on the inflation during the holding period. In the second section, we examine
how inflation indexation can help cut the capital gains tax. It is a useful strategy that can reduce the effective
tax to almost zero during times of high inflation. Finally, we look at the investment options available for saving
capital gains tax. Under Section 54, if the capital gains are reinvested in certain specified options or used for
buying residential property, the tax can be avoided.
The story is well-timed because the financial year is drawing to a close. Investors have a two-week window to
plan their capital gains tax. Some may book losses in stocks before 31 March. Others may invest in FMPs
for double indexation. Whatever your situation is, use this opportunity to minimise your tax and maximise
Certain capital losses can be adjusted against other gains.
March is a busy month for taxpayers — not only the lazy ones who didn't do their tax planning through the
year, but also savvy investors who want to book losses before the end of the financial year.
Retail investors generally hate to book losses, but smart investors do it regularly to reduce their tax. If you,
too, have suffered a loss in a stock bought less than a year ago, this could be a good time to sell it and book
a loss. You can always buy back the stock later if you are convinced that it is a good long-term bet.
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However, make sure this is not an intraday transaction. You must sell the loss-making shares and give delivery
before buying it back. Intra-day trading does not get the same benefit. "These are speculative activities, not
delivery-based. The gains will be treated as business income," says Minal Agarwal Jain, managing partner,
Mahesh K Agarwal & Company.
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Keep an eye on the calendar when you book short-term losses on stocks. If it has been more than a year
since you bought the stock, you will not be able to adjust the loss. Only short-term losses (made within a year
of the purchase) from stocks can be set off against gains. Long-term losses are not eligible for this tax benefit.
Experts warn that one should not go overboard with this strategy of booking losses and buying back the
security. "If you conduct a large number of short-term transactions, the tax department may treat it as
business activity and tax you accordingly," says Nikhil Bhatia, executive director, PwC India. You may have to
pay tax according to your slab even on long-term capital gains from stocks.
There are some other things that you should keep in mind. Long-term capital losses can be set off only against
long-term capital gains. If you bought a property for Rs 40 lakh in March 2008 and sold it five years later for Rs
60 lakh in April 2013, you would actually incur a loss. This is because the indexed cost of the property would
be Rs 64.5 lakh. The Rs 4.5 lakh capital loss can be adjusted only against other long-term gains.
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Readers' opinions (34)
Sort by: Newest | Oldest
14 Apr, 2014 11:15 AM
Advocate Sarin (INDIA)
Very useful and informative article specially for the young people who are active traders in Share Market and lose
money in trading but are not aware how they can use these losses to reduce their tax liabilities at least.
23 Mar, 2014 01:34 PM
VInayaka (Bangalore)
In MNC's often employees are awarded with RSUs and ESPP, How is the Capital Gains calculated if the stocks
are listed in foreign country?
22 Mar, 2014 11:55 AM
ssundararaman20 sundararaman (mumbai)
Thanks for the useful information at the right time. If they exempt taxing short term gains, Bank FDs.. etc. upto a
higher bracket.. it would encourage more activities in the market.. pumping in more funds into the productive
sectors.. towards better national growth in the long run.
22 Mar, 2014 12:07 AM
Pushpa Mohan (Chennai)
What about mutual funds and growth funds? Are gains from it taxable?
22 Mar, 2014 02:00 PM
ET Wealth (Delhi) replies to Pushpa Mohan
Pushpa, the taxability depends on the category of mutual fund. Gain from equity and equity-
oriented funds (with more than 65% invested in stocks) are taxed at 15% if investment is held for
less than a year. If held for more than a year, the gains are tax free. For other funds, the gains are
added to income and taxed at normal rate if investment is held for less than a year. If held for
more than a year, the gains are taxed at 10% flat or 20% after indexation
20 Mar, 2014 05:36 AM
Anand Dubey (Thane)
nice article about saving money
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