Share Market losses can reduce your tax burden

The Indian equity market is highly volatile for the last 5 years and even long term investors find it difficult to make money in this market. Markets are in the same level, as they were in 2007. All are waiting for the change of this situation and a ray of hope for the equity market to start its bullish trend.

In this situation, what are the opportunities to earn that extra money? You can utilize your stock market losses, to reduce your income tax liability! Here is how it works.

Suppose you have purchased 1000 shares of BHEL in September 2011 for Rs.355/- per share. Now the share is quoting at around 230/-. You are sitting at a nominal loss of 1.25 lakhs. Since you have made this as a long term investment, you are not bothered about the nominal loss. Still you can utilize this market fall to reduce your tax burden.

Save tax by selling at a loss

You sell these shares at 230/- to book losses and then buy it again after 2 days. The loss you booked, on shares bought less than 12 months will be treated as short term capital losses. This loss can be adjusted against gains from other investments. This can be adjusted against any short term gains from equity shares/mutual funds, long term gains from debt mutual funds, Gold Exchange Traded Funds or sale of physical gold. If you cannot adjust the full loss in the same financial year, you can even carry forward the unadjusted loss upto 8 financial years. So, in the next 8 years, when you are making any gains under the above heads, the gains can be adjusted against this carry forward losses and reduce the tax liability.

Please note that this is applicable only in case of shares /equity mutual funds, purchased within 12 months. So, before booking loss, please confirm the purchase date. The shares/funds purchased more than 12 months ago will not be eligible for this, because such losses will be taken as long term capital losses. Such losses can be set off against only long term capital gains. Also, note that the sale of shares/funds is on a first in first out basis (FIFO). As per this, the shares you purchased first will be deemed to have been sold first.

But there is a risk

If the share price goes up immediately after your sale, you have to buy them back, at a higher price. This risk is always there in such transactions. What you can do is to sell your shares in small lots of 100 shares and buy them back in the next day. If you want to sell and buy back 1000 shares, do it over the next 10 trading days, so that you can limit your risk of prices going up.

Don’t sell and buy back on the same day because tax department will view such day trading transactions as speculative in nature and can be disputed. Better buy back shares 2 days after sales.

Keep records and file the IT returns by due date

Keep the contract notes of all such transactions safely. You may have to mention the transaction details while filing the IT returns. You will be allowed to carry forward the losses only if you file the IT return by the due date.