Book Losses before 31 March And Set Off Against Cap Gains For Next 8 Yrs, Advise Tax Experts
ARE you sitting on unrealized losses from the recent downturn in the stock market? If the investments are less than a year old, you could put it to good use and lower your tax liabilities for the current financial year. Tax experts are advising investors to book their losses on or before March 31 this year and buy back those positions in the next financial year. By doing so, the tax on short-term capital gains (if any) can be set off to the extent of the short-term capital losses.
Market watchers are expecting some sharp swings in many small and medium cap stocks over the next few weeks as investors try to balance their account books.
Short-term capital losses for the year can be set off against any capital gains, short or long term, reported under the head, income from capital gains. In case the gains are lower than the losses, the excess short-term capital losses can be carried forward and set off against capital gains for eight successive assessment years.
Long-term capital losses on security transactions liable to securities transaction tax cannot be offset against any income, and cannot be carried forward for offsetting against any future gains.
This trend (of lowering tax liability by booking temporary losses) is also seen in other countries like the US, subject to fulfillment of certain conditions, where it is widely known as January effect.
However, investors have to bear in mind that short-term capital loss (STCL) first has to be adjusted with any short-term capital gains and only then with long term capital gains on transactions not liable to STT (like sale of gold, real estate, etc).
The theory behind the January Effect is that small stocks that perform poorly during the year fall victim to tax-related selling by mutual funds and other investors late in the year to capture the capital gains. As this drives prices down, presumably below true value, in December, investors buy back the same stocks in January, resulting in high returns.
However, there is a rule (wash sales rules) preventing investors from selling and buying back the same stock within 45 days for tax purposes. But in India, there is no such restriction that forbids investors from benefiting from this. So, many small-cap stockholders look for ways to avoid being taxed on non-profitable stocks. If they can sell these shares before the following year begins, their capital gains taxes should be lower.
ARE you sitting on unrealized losses from the recent downturn in the stock market? If the investments are less than a year old, you could put it to good use and lower your tax liabilities for the current financial year. Tax experts are advising investors to book their losses on or before March 31 this year and buy back those positions in the next financial year. By doing so, the tax on short-term capital gains (if any) can be set off to the extent of the short-term capital losses.
Market watchers are expecting some sharp swings in many small and medium cap stocks over the next few weeks as investors try to balance their account books.
Short-term capital losses for the year can be set off against any capital gains, short or long term, reported under the head, income from capital gains. In case the gains are lower than the losses, the excess short-term capital losses can be carried forward and set off against capital gains for eight successive assessment years.
Long-term capital losses on security transactions liable to securities transaction tax cannot be offset against any income, and cannot be carried forward for offsetting against any future gains.
This trend (of lowering tax liability by booking temporary losses) is also seen in other countries like the US, subject to fulfillment of certain conditions, where it is widely known as January effect.
However, investors have to bear in mind that short-term capital loss (STCL) first has to be adjusted with any short-term capital gains and only then with long term capital gains on transactions not liable to STT (like sale of gold, real estate, etc).
The theory behind the January Effect is that small stocks that perform poorly during the year fall victim to tax-related selling by mutual funds and other investors late in the year to capture the capital gains. As this drives prices down, presumably below true value, in December, investors buy back the same stocks in January, resulting in high returns.
However, there is a rule (wash sales rules) preventing investors from selling and buying back the same stock within 45 days for tax purposes. But in India, there is no such restriction that forbids investors from benefiting from this. So, many small-cap stockholders look for ways to avoid being taxed on non-profitable stocks. If they can sell these shares before the following year begins, their capital gains taxes should be lower.
