Turning Losses Into Gains- Part 1

EQUITY EQUATION

Point 1: Fundamental answer

• Though shares are a capital asset, "a loss from equity can be adjusted only against income from equity" and not against the Salaried Income. 

Point 2: What is Long term and short term Asset? 

• Equity and equity-based mutual funds are considered long-term assets when held for at least a year and short term if held for less than one year. 

Point 3: What can be adjusted?

• Only short-term losses (made within a year of the purchase) from stocks can be  adjusted against short-term gains from stocks. Long-term losses are not eligible for this tax benefit.

Point 4: What to do if you are losing money on an equity holding?

• You can sell within a year to book short-term capital loss. Even if you are sure about a future recovery, you can do this every year as hedge against a possible loss. Short-term capital gains from equities are taxed at 15%. Here is how it works.

• Let us say you buy 100 shares for Rs 1,000. If the price falls to Rs 500 just before a year of the purchase, you can sell and buy an equal number of shares at lower price. This short-term loss of Rs 500 can be set off against any short-term gain from shares in future. 

• Now, you have also made a new investment of Rs 500. In the second year, you sell these shares for Rs 1,500, which translates into a short-term gain of Rs 1,000. You have a total carry-forward short-term loss of Rs 500. The effective short-term gain is Rs 500, on which you will have to pay 15% tax. If you had held on to the initial investment, the net gain would have been tax-free, but you would have also taken a higher risk  (You must sell the loss-making shares and give delivery before buying it back. Intra-day trading does not get the same benefit)

Point 5: How to offset Long term Equity Loss?

• You can make a Long term Equity Loss eligible for deduction by transacting outside the exchanges at the existing market rate with simultaneous delivery to the buyer. "A long-term loss on listed equities where STT is paid cannot be adjusted because the income is exempt. If you sell the shares offline without paying STT, the loss can be adjusted against a long-term capital gain," says Kaushik.