Ravi Singhal, CEO, GCL Broking, explains how a taxpayer can go about reducing her/his tax liability if they suffer losses while investing or trading in the stock market.
Depending on the performance of the market, equity portfolios are vulnerable to market risk and could experience capital gains or losses.
Most individuals are unaware of how this income is taxed when it comes to buying and selling shares, but they should be informed that income/loss from the sale of equity shares is treated under the head 'Capital Gains'.
There are several rules and provisions for capital losses under the Income Tax Act, as a result, taxpayers should be much aware of the ways to set off losses in Income Tax Returns and reduce their tax liability.
Rules: How to set off capital losses in Income Tax Returns (ITR)
Shareholders can counterbalance stock market losses against gains and carry forward any residual losses to subsequent fiscal years to lower their tax liability.
Capital losses incurred from the sale of shares or mutual funds cannot be reported against the head salary income.
Gains or losses made from stock market investments are categorised under the Income Tax Rules as capital gains/losses, business income/loss, and speculative income/loss.
Based on these types of transactions, any income from stock market deals may be taxed as capital gains on investment or as profits and gains from a business or profession.
Income is further divided into long-term capital gains (LTCG) and short-term capital gains (STCG) under the heading 'Capital Gains'.
Short-term capital gains are taxed at 15 per cent regardless of your tax bracket if equity shares listed on a stock exchange are sold within 12 months of purchasing.
The buyer may realise a short-term capital gain (STCG) or face a short-term capital loss (STCL) as a result.
Here the capital loss can be adjusted on long-term capital gain or short-term capital gain for the next eight assessment years.
Shareholders should be aware that equity share sales that result in any short-term capital losses may be offset by equity asset sales that result in either short-term or long-term capital gains.
It can be offset by any long- or short-term capital gains under the head other sources of income if the shareholder fails to set off her/his entire capital loss in the same assessment year, as per section 35AD.
In case of long-term capital gain or loss where the holding period is more than 12 months, the long-term capital gains are taxed at 10 per cent without the benefit of indexation in case of the sale of listed securities and if it exceeds Rs 100,000 under Section 112A.
In the case of capital loss, it can be adjusted on long-term capital gain for eight years.
In the case of intraday trading, where the shares are bought and sold on the same day, the capital gains made are treated as speculative business income and are taxable as per your applicable tax slab rates.
Any capital loss made can only be set off against speculative income for four years.
To carry forward losses to the following eight assessment years, the taxpayer needs to file her/his ITR on time as per Section 139(1).
As per the Income Tax Act, loss under the head 'Profits and gains of business or profession' can be carried forward even if the return of income/loss of the year in which loss is incurred is not furnished on or before the due date of furnishing the return, as prescribed under section 139(1).
It is crucial for individuals to understand that only long-term capital gains may be offset by long-term capital losses.
However, a short-term capital loss can be offset by a long-term or short-term capital gain, but a loss under the 'Capital gains' head cannot be offset against income under the head income from other sources, as per the provisions set under Income Tax Act.