How to set off losses from share trading

Yet to book losses or thinking about booking them? Here are the ways to set off those losses and carry them forward to take advantage of them.

Kavya Balaji   /   May 9, 2020
set off losses from share trading

The ongoing crash in stock prices is being prescribed as a chance to enter the market at moderately lower costs for the long haul. This point of view is being talked about broadly, however this piece is about a strategic opportunity to make good of your losses. This is tied in with setting off losses and taking the advantage thereof.

What are capital losses?

When you sell a capital asset for a price higher than its purchase price, it is a capital gain. When the money from the sale of a capital asset is less than cost of acquisition and expenses on transfer, it is a capital loss. 

The rules

The Income Tax department does not allow loss under the head capital gains to be set off against any income that you might have earned under any of the other heads such as salary income or income from other sources. You can set this off only within the capital gains head. Note that shares and equity mutual funds are long term capital assets when held for more than 12 months.

The standard rule about set-off of losses says that the loss from the transfer of a short-term capital asset or Short Term Capital Loss (STCL) can be set off against gains from the transfer of either a long-term or short-term capital asset, that is, a Long Term Capital Gain (LTCG) or Short Term Capital Gain (STCG) in that year. 

So, if you sell a stock or an equity-oriented mutual fund scheme (this includes only the growth option) within a year of buying it at a loss, you can set off that loss against LTCG or STCG from any capital asset. The other part of set-off is that the loss from transfer of a long-term capital asset or a Long-Term Capital Loss (LTCL) can be set off against gains from transfer of LTCG from any capital asset in that year.

For instance, if you had invested in debt-oriented mutual fund scheme and sold it within three years of holding, you can set off STCG against the STCL from equity. If you redeem the debt mutual fund after three years, it is considered as a long-term capital asset and the LTCG can be set off against the LTCL from equity. 

Note that if you had purchased stocks or funds before January 31, 2018, things will be a bit different. This date is the ‘grandfathering date’ for equity prices. So, if you had purchased your funds before this date, the initial purchase price will not be considered. The price as on January 31, 2018 will be considered as the price for tax purposes.

Not able to set off losses, there is a solution for that too.

Carry forward of losses

If you are unable to set off your entire capital loss in the same year, you can carry losses forward. This includes both STCL and LTCL. You can carry forward these losses for 8 assessment years that immediately follow the assessment year in which you made the losses. If capital losses have arisen from a business, you are allowed to carry forward those losses. You can do that without running the business. Carrying on of this business is not compulsory.

Tax strategies

Not happy about selling those stocks or mutual funds? You can book the loss now and buy the stocks or mutual fund units and hold them for the long run. Also, if you are worried about booking profits to set off losses and paying taxes, here’s a solution. Equities being long-term investments, you will eventually sell them after five, ten or fifteen years. Since you are selling them now and buying them at a relatively lower price, you might have to pay more in taxes later as you will have more gains. Well, there is a solution for this. As you might know, up to Rs. 1 lakh of LTCG from equities is exempt from tax per financial year. Try and book capital gains of up to Rs. 1 lakh every year. Once you book profit, you can buy the stock or mutual fund unit to maintain your long-term investments. There is no limit on the amount you can set off or carry forward. However, the amount of LTCG you can book per year without tax is limited.

Mandatory info on capital losses

The Income Tax Department has made it mandatory that investors cannot carry forward losses for a year unless that year’s income tax return (ITR) has been filed by them before the due date. Even if it’s only the capital losses and you do not have any income to show that year, you will need to file your ITR.

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