Capital Gain Set Off

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THE global meltdown has left many sore -- investors have lost fortunes, and several others have

gone bankrupt. The truth is losses arent all that bad, especially if you know how best to takeadvantage of them.

Benefit from your short-term capital losses

There is an upside to this environment despite the fact that equities are deep in the red. A smartthing to do is to book all your short-term capital losses. You may not benefit from setting them

off against profits this year (because capital losses can only be set off against capital gains), but

you can carry forward the same for the next eight years.

Current prevailing short-term and long-term capital gains tax rates:

Asset class Short-term Long-term

Benchmark Capital GainBenchmarkCapital Gain

Listed Shares 12 months Nil

Equity MFs 12 months Nil

Debt MFs 12 monthsLower of flat 10%+cess;

20%+cess on indexed cost

Real Estate 36 months 20%+cess on indexed cost

Gold 36 months 20%+cess on indexed cost

So how do you go about taking advantage of your short-term losses? Lets look at an illustration.

You bought a real estate company stock for Rs 50,000 and its now down to Rs 10,000. Let usalso assume that you have been holding this for less than 12 months, that is, it is a short-term

asset.

What are your options:

Option 1: You hold the share at Rs 10,000. Now, suppose in FY 2010, you sell it for Rs 30,000

(assuming you sell it after 12 months of purchase).

Sale value: Rs 30,000Cost value: Rs 50,000

Long-term capital loss: Rs 20,000

You cannot use this loss to set off other capital gains or carry forward this loss to the next year.

This is because long term capital gains are tax free, so long term capital losses cannot be used to

set off other taxable income.

Option 2: You sell the share and book the loss this year, before March 31, 2009:

Market value of share = Rs 10,000

Cost value of share = Rs 50,000

Short-term capital loss = Rs 40,000

Scenario 1: You make a short-term capital gain of at least Rs 40,000 on selling shares or equity


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mutual funds in financial year 2010 (that is between April 2009 and March 2010)

The tax you would have to pay = 15 per cent of Rs 40,000 = Rs 6,000

However, you have a loss of Rs 40,000 carried forward from last year. This loss can be set off

against this years capital gain. Therefore:This years' capital gain = Rs 40,000

Less: Last year's capital loss carried forward = Rs 40,000

Net gain/ loss = Rs 0

Saving: Rs 6,000 which you would have otherwise paid as tax

Scenario 2: You make a short-term capital gain of at least Rs 40,000 on selling property or gold

or debt mutual funds in financial year 2010 (that is between April 2009 and March 2010)

The tax you would have to pay = 30 per cent of Rs 40,000 = Rs 12,000

However, you have a loss of Rs 40,000 carried forward from last year. This loss can be set off

against this years' capital gain. Therefore:This years capital gain = Rs 40,000

Less: Last year's capital loss carried forward = Rs 40,000

Net gain/ loss = Rs 0

Saving: Rs 12,000 which you would have otherwise paid as tax

Tip: When you sell your share, buy it back immediately so that there is no additional cashoutflow (except for 1 per cent brokerage on buying). That way, you can continue to own the

shares that you bought.

Rule of set-off and carry forward of other losses:When you incur a loss, you (the assessee) are allowed to set off such losses against any gains. If

you are unable to set-off such loss within the same year, it can be carried forward and set-off inthe subsequent years.

Heres a quick reckoner on the rules applicable for set-off and carry forward of losses

Type of loss Set-off in year of loss Sef-off in next yearsNo. of

years c/f is

allowed

House property loss

Any Head of Income

(Including Salary

Income)

Income from HouseProperty

8 years


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Speculation Loss Speculation Profits Speculation Profits 4 years*

Non-Speculation Loss

On A/C of unabsorbed

depreciation, capital

expenditure on scientific

research and family Planning

Any income (Not

being salary income

from AY 2005-06)

Any income (Not

being salary income

from AY 2005-06)

No time

limit

Other remaining business loss

Any business profit

(Whether from

speculation orotherwise)

Any business profit(From speculation or

otherwise)

8 years

*8 years upto AY 2005-06; (AYAssessment Year)

Make the most of the current downtrend by setting off your losses and reducing your tax liability

significantly not just in the current year but in subsequent years as well!


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Capital Gains Tax on

Equity

Written by Bimlesh Singh

Thursday, 26 January 2012 00:00

January to March is the busiest period for earning people as financial year closes and you have tocomplete your tax filing formalities. Your job gets bit tougher if you are earning from diversified sourcesother than your salary. As you are an informed investor and your investments spans debt, equity, mutualfunds, real estate and commodities which ultimately increase the complexity of tax filing process. Taxesfor different asset classes are handled differently by Indian tax laws. If you are aware of the tax lawspertaining to individual asset classes you can save quite a lot of money every financial year.

If you are not a typical conservative investor and understand risk and reward concept, then you must beinvesting is equities. The tax rules related to equities are quite interesting and having knowledgeregarding the same will enhance your returns in long run. Lets try to explore how equity investment istreated for taxation purpose.

Taxation is based on time frame of holding your equity investment

There are broadly two types of capital gains taxes on equity investment:

1. 1.Short term capital gains tax- If the holding period of the stock is less than one year its treatedas short term investment by tax man and any capital gain on this investment attracts a tax of 15%of the gain.

2. 2.Long term capital gains tax- If the holding period of the stock is more than one year itstreated as long term investment and the long term gain on such investment do not attract any tax.

Let's take example of Mr. Shyam which will explain the capital gains taxes in details.

Let us say Mr. Shyam has bought stock X and Y both on April 10, 2011 for a price of 10000 each. As onNov 20, 2011, his investment portfolio is as follows:

Stock Purchase Price - April 10 2011 Market Price - Nov 20 2011X 10000 15000Y 10000 8000

In Nov we can see that he is having a capital gain of 5000 on stock X and a capital loss of 2000 on stockY.

Now Mr. Shyam can do four things with his investment and accordingly his tax will vary:

1. He holds his stock and doesnt sell it till April 11 2012 and sells after that Zero tax as hisholding period is more than one year (Long Term Capital Gain Tax)

2. He sells stock X (Profit = 5000) and hold stock Y which is in loss - On the profit of 5000 instock X he pays short term capital gains tax of 15% i.e. 750.
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3. He sells stock X, books profit of 5000 and sells stock Y, books loss of 2000 His net profitis 3000. He pays tax of 15% on profit i.e. 450.

4. He holds stock X for more than one year and book loss in stock Y No long term capitalgains tax in stock X and short term capital loss of 2000 in stock Y. This loss of 2000 can becarried forward for 8 years and whenever he has short term profit this short term loss will bededucted from that profit and then short term capital gain tax of 15% will be applied.

Conclusion

Now as you know how the tax man treats tax on your equity investment its pretty easy to understand thatby just holding the stock for one year you enhance your return by 15% of your net profit. One of the mostignored parts is the carry forward rule which provides you an opportunity of reducing the tax burden incase of capital loss for another 8 years. Equity investment from the basic core of its heart is a long terminvestment and this taxing benefit proves to be an icing on the cake. So from next time whenever youplan to sell your stock just take into consideration the tax benefit.

Jagbir Singh- Thursday, January 26, 2012 at 11:26 PMyou could add another example i.e. oflong-term cap loss on shares - the same can't be adjusted against capital gain nor can it be c/f.

Many are not aware of this fact.

Besides, these rates apply to shares traded through the stock ex. (on which STT is paid). This is

to say, LTCG on unlisted shares is taxed @ 20%. Similarly STCG on unlisted shares is subject to

tax rates according to ones tax slab.
mailto:[email protected]:[email protected]:[email protected]


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We all know that when we earn income/profit, we have to pay taxes on it. While endeavoring to

derive income, the possibility of incurring losses cannot be ruled out. The Income-Tax Actallows you to offset your losses against your income/profits and carry them forward to

subsequent financial years (FYs). One needs to understand the provisions for this and carrying

forward losses to be able to fully ascertain the net impact on your taxable income.

Losses from house property

Loss from house property can be offset against income from any other head, including salary in

the same FY. If there is no sufficient income against which such a loss can be offset, the

remaining loss can be carried forward up to eight FYs. In subsequent FYs, such a loss can beoffset only against income from house property.

Loss from capital gains

Losses under this are categorised as short term and long-term capital gains. Short-term capital

loss can be offset against any capital gainlong term or short term. Long-term capital loss canbe offset only against a long-term capital gain. Any capital loss after the offset can be carried

forward up to eight FYs. A short-term loss which is carried forward can be set off against any

capital gains. A long-term capital loss which is carried forward can be offset against only long-term capital gains. Both long-term and short-term capital losses cant be offset against incomefrom any other source.

Loss from business

Loss from business or profession cannot be offset against salary incomes. The loss can be carriedforward up to eight FYs and can be offset only against the income from business/profession.

Loss from other sources

Loss under this (other than loss from owning and maintaining racehorses) can be offset againstincome from another source except the income from lotteries, crossword, gambling or other

games. The loss under this (other than that from owing and maintaining racehorses) cannot be

carried forward to the following FYs.

It is mandatory to file a loss ITR within the due date to be eligible to carry forward losses. The

only exception to this is loss from house property which can be carried forward even if the ITR is

not filed within the due date.

How to adjust losses:

1: Adjustment under the same head of income: If you have incurred a loss under a particular

head of income, say business, you are allowed to offset it against other business income.


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2: Inter head adjustment in the same FY: This is applicable only if it is not possible to offset a

loss under 1. If you have incurred a loss from house property, you are allowed to offset it againstother income heads like salary income or capital gains.

3:Carry forward losses up to the specified period: This step is applicable only if it is not

possible to offset a loss under 1 and 2.

Save Tax with ELSS Mutual Funds November 25, 2011 In this article, we have explained the benefits and

factors to consider while investing in Equity Linked Saving Schemes. Author : Raju Singh

The purpose of tax exemption under section 80C is to promote the habit of savings and long term investment.Unfortunately, however, we generally dont plan for the ideal investment avenue in advance and take last minutedecisions, disregarding all the good advice we know about choosing investment products well. With this article, weevaluate the ELSS mutual funds category, a Section 80C favourite, and discuss the best way to get the most out ofyour ELSS investments.

As per Section 80C of Income Tax Act, individuals are allowed to invest up to Rs. 100,000 in tax saving instruments,which will be deductible from their Gross Total Income. Tax-saving mutual funds (or ELSS i.e. Equity Linked SavingSchemes as they are more popularly known), Insurance Plans, PPF, and NSCs are some of the avenues where aninvestor can invest and save tax. When selecting a tax saving product, choose one that can help you meet your

financial objectives and matches your saving patterns. Broadly, consider the following points:

Liquidity

Investment avenues available under section 80C carry lock in period ranging from 3 years to 15 years. So select aproduct which is in line with your investment horizon.

Risk & Returns

There is always a tradeoff between risk and returns - the higher the potential returns, the higher the risk. Select aproduct which is suitable to your risk appetite.

Inflation Protection

Inflation eats into the value of your returns. Consider real returns (Returns Inflation) when evaluating whether aparticular product can help you meet your financial objectives.

Tax implication at redemption

Apart from the tax benefit under section 80C, tax implications on the returns is also an important to point considerwhile selecting a investment product. The interest earned on Fixed Deposits or NSC (National Saving Certificate) istaxable and hence that reduces returns on these products. Long term returns on mutual funds (more than 1 year)


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are tax free.

INVESTING IN AN ELSS FUND

Equity Linked Saving Schemes are equity-oriented mutual funds with tax benefits. They score over other tax saving

investment products in some respects. They have the lowest lock in period, i.e., 3 years, and being market linkedhave the potential to generate good returns over long term. Investors with moderate to high risk appetite shouldseriously consider investing in these funds. However, it is difficult to ignore the assured returns and capitalprotection aspect of other products like PPF, NSC and FDs.

Dividends received from ELSS funds are also exempt from tax. However, when investing in ELSS funds, it isadvisable to not go in for the Dividend Re-investment option, as each re-investment will be treated as a freshinvestment and will lock in your re-invested money for another 3 years. This loop makes it difficult to exit the fundcompletely at one point of time. It is therefore wise to select either the Growth or Dividend Payout option in thesefunds.

The same logic applies if you decide to go in for an SIP mode of investing in ELSS funds. While SIPs are verydesirable in terms of allowing disciplined and small investments, each SIP installment is locked in for three yearsfrom investment, creating a similar loop.

Lastly, this might be the last year that allows you to take advantage of the tax savings offered by ELSS funds. If theparliament passes the Direct Tax Code in its winter session, ELSS funds along with many other investment productsmay no longer attract tax exemption after April 2012. Any fresh investment in an ELSS fund after April 2012 will betreated as an equity mutual fund investment.

SELECTING AN ELSS FUND

All together 48 Equity Linked Saving Schemes are available in the market. Of these, 37 funds are open-endedfunds, of which 30 funds have a track record of 3-years or more. Only 14 funds out of 30 manage to beat thecategory average in the 3-year period. So selecting a right fund is more important, as the money is going to belocked in for 3 years.

For selecting an ELSS fund, one can evaluate the following parameters:

Historical track record of the fund: The historical performance of the fund can be evaluated acrossvarious time periods to see how the fund has performed compared to its benchmark or other comparableindices and the peers. That apart, fund performance in falling markets can also be looked at to get betterperspective about the fund.

Consistency of the Fund: Consistent performance is an important point to consider when selecting afund. Some funds give phenomenal performance in one time period and are not able to continue that infuture. So prefer to choose a fund that has a history of consistent performance.

Track record of the Fund Manager: The Fund Manager is the main driver behind the investmentstrategies of the fund. Historical performance of the Fund Manager can be reviewed by evaluating theperformance of the funds managed by him.

Performance of Top 10 ELSS based on 3 year returns

CAGR %

Scheme Name 3 Years 5 Years 7 Years 10 Years

Canara Robeco Equity Tax Saver Fund (D) 32.49 14.10 22.09 21.89

ICICI Prudential Tax Plan (G) 31.83 6.21 19.30 28.35

HDFC TaxSaver Fund (G) 28.91 7.86 21.81 29.10


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Fidelity Tax Advantage Fund (G) 28.56 11.30 NA NA

Religare Tax Plan (G) 28.19 NA NA NA

Franklin India Taxshield Fund (G) 27.54 10.20 19.41 25.69

ING Tax Savings Fund (G) 26.63 1.55 14.53 NA

HDFC Long Term Advantage Fund (G) 26.46 6.70 16.91 29.40

Sahara Tax Gain Fund (G) 25.92 11.13 8.19 15.29Taurus Tax Shield Fund (G) 25.46 13.06 14.33 16.87

Returns as on Nov 15, 2011 Source:Ace MF, iFAST compilations

Equity Linked Saving Schemes have a good track record, with performance similar to diversified funds. Thecategory average returns on 3-yr, 5-yr, 7-yr and 10-yr are 22.23%, 5.20%, 15.41% and 22.17% CAGR respectively.Even the returns for SIPs (Systematic Investment Plans) are also good. However, market slumps in recent timeshave hit the performances of equity oriented funds including ELSS.

CONCLUSION

Negative news is flowing across the globe every day. Indian economy is slowing down. The profit margins of the

Indian corporate sector are under immense pressure due to high borrowing and raw material cost. There has been adowngrade in 3rd Quarter GDP and the Indian Rupee has depreciated by close to 16% in few months and it is theworst performing currency in Asia. Equity markets (Sensex) have given negative returns of close to 21% year todate. European debt crisis is spreading to major European economies. US economy is also in bad shape. All thishas led to a high level of pessimism in the market.

However, the equity market has already discounted the negative news. We believe that there may be headwinds onshort term, but long term prospects for equity markets are promising and this could be a good time for investors toget equity exposure for long term, via products like ELSS funds.

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