It makes perfect sense to offset short-term capital losses against short-term or long-term gains not just for this financial year, but for up to eight consecutive years
REMEMBER the catch phrase of Unilever’s globally-acclaimed TV commercial for washing powder brand, Surf Excel — daag achche hain (stains are good). It conveyed that if an experience is a learning one, then stains can be indeed good. Investing too has its share of good and bad experiences. But, what differentiates an intelligent investor from the other is the ability to gain from losses. Yes, you read it right! This week, we decided to give you a few reasons to book your capital losses to ensure better returns — not only this financial year but also for future.
According to provisions, you are allowed to offset short-term capital losses against short-term or long-term capital gains not just for this financial year, but for up to eight consecutive years. This means that if you book short-term capital losses before March 31, you can not only reduce tax incidence for the year on capital gains income but also save on capital gains, if any, you acquire over the next eight financial years.
For starters, short-term capital assets is one which is held for not more than 36 months immediately prior to the date of transfer. There are, however, exceptions. In case of shares, securities units of UTI, specified mutual funds and zero coupon bonds, if they are held for not more than 12 months, they would be considered as short-term capital assets. The definition, in case of, long-term capital assets is simple. Those assets other than short-term capital assets would be considered as long-term capital assets.
HOW TO APPRAISE
Tax experts say your first step should be to ensure that all income, expenses, profits and losses relating to this financial year are appropriately determined and captured by way of documentation in order to be assessed accordingly. Once done, if you have made profits on certain assets (as a result of which you are liable to pay tax), then you must evaluate the performance of your short-term assets. If these assets are, in any case, not likely to fetch a profit in the foreseeable future, then you must dispose them and book losses to set off such losses against the gains computed from the sale of other capital assets. Even if you think that these assets can deliver in the times to come, you can still go ahead with your decision. Confused? Logic is simple: you can always buyback these assets at the same price you sold them in the market. And since you bought them again, any gain or loss arising out of these assets would be treated as short-term for 12 or 36 months, depending on the nature of the asset. For instance, suppose you have Rs 10 lakh as capital gain from the property and you are holding shares/mutual units which are at a loss (short-term) of Rs 12 lakh on March 30, 2008. Then, it’s advisable to sell the shares and buyback the same day. In this process, loss will be booked from the income-tax point of view and capital gains arising out of property will be exempt. Further, you can carry forward Rs 2 lakh as short-term capital losses to the next eight financial years.
THINGS TO REMEMBER
It may seem to be a simple black and white decision, but there are intricacies involved. Tax advisers say you must keep the cost factor in mind. Besides that, income tax returns for carry forward of losses should be filed on or before the due date of filing the return of income. This is a must to claim the set-off of the carried forward losses in future years, otherwise you may not be entitled to set off such losses.
It is worth mentioning here that losses on long-term assets can be set off only against gains from sale of long-term assets. Accordingly, booking losses on long-term shares may not be of much use as such losses can be set-off against gains from long-term shares, and gains are, in any case, exempt. Then, long-term capital losses on the transfer of shares sold through recognised stock exchange are not allowed to be set-off. But, if these shares are not sold through stock exchange, long-term capital loss is allowed to be set-off against other income.
So, what are you waiting for, you have two days left to make every penny count. Go on and make sure that you make the best of this opportunity.
Wishing you happy losses!!!
REMEMBER the catch phrase of Unilever’s globally-acclaimed TV commercial for washing powder brand, Surf Excel — daag achche hain (stains are good). It conveyed that if an experience is a learning one, then stains can be indeed good. Investing too has its share of good and bad experiences. But, what differentiates an intelligent investor from the other is the ability to gain from losses. Yes, you read it right! This week, we decided to give you a few reasons to book your capital losses to ensure better returns — not only this financial year but also for future.
According to provisions, you are allowed to offset short-term capital losses against short-term or long-term capital gains not just for this financial year, but for up to eight consecutive years. This means that if you book short-term capital losses before March 31, you can not only reduce tax incidence for the year on capital gains income but also save on capital gains, if any, you acquire over the next eight financial years.
For starters, short-term capital assets is one which is held for not more than 36 months immediately prior to the date of transfer. There are, however, exceptions. In case of shares, securities units of UTI, specified mutual funds and zero coupon bonds, if they are held for not more than 12 months, they would be considered as short-term capital assets. The definition, in case of, long-term capital assets is simple. Those assets other than short-term capital assets would be considered as long-term capital assets.
HOW TO APPRAISE
Tax experts say your first step should be to ensure that all income, expenses, profits and losses relating to this financial year are appropriately determined and captured by way of documentation in order to be assessed accordingly. Once done, if you have made profits on certain assets (as a result of which you are liable to pay tax), then you must evaluate the performance of your short-term assets. If these assets are, in any case, not likely to fetch a profit in the foreseeable future, then you must dispose them and book losses to set off such losses against the gains computed from the sale of other capital assets. Even if you think that these assets can deliver in the times to come, you can still go ahead with your decision. Confused? Logic is simple: you can always buyback these assets at the same price you sold them in the market. And since you bought them again, any gain or loss arising out of these assets would be treated as short-term for 12 or 36 months, depending on the nature of the asset. For instance, suppose you have Rs 10 lakh as capital gain from the property and you are holding shares/mutual units which are at a loss (short-term) of Rs 12 lakh on March 30, 2008. Then, it’s advisable to sell the shares and buyback the same day. In this process, loss will be booked from the income-tax point of view and capital gains arising out of property will be exempt. Further, you can carry forward Rs 2 lakh as short-term capital losses to the next eight financial years.
THINGS TO REMEMBER
It may seem to be a simple black and white decision, but there are intricacies involved. Tax advisers say you must keep the cost factor in mind. Besides that, income tax returns for carry forward of losses should be filed on or before the due date of filing the return of income. This is a must to claim the set-off of the carried forward losses in future years, otherwise you may not be entitled to set off such losses.
It is worth mentioning here that losses on long-term assets can be set off only against gains from sale of long-term assets. Accordingly, booking losses on long-term shares may not be of much use as such losses can be set-off against gains from long-term shares, and gains are, in any case, exempt. Then, long-term capital losses on the transfer of shares sold through recognised stock exchange are not allowed to be set-off. But, if these shares are not sold through stock exchange, long-term capital loss is allowed to be set-off against other income.
So, what are you waiting for, you have two days left to make every penny count. Go on and make sure that you make the best of this opportunity.
Wishing you happy losses!!!
