How Can Losses Help To Reduce your Tax?

You can try to reduce tax liability even at the time of a loss. One has to book capital gains that are considered short term investments. Analysis has to be made if the asset under question has to be sold or kept.

It’s February, 2016 and a lot of investors have not only felt but experienced the overwhelming losses in the stock markets in the country, along with other investment instruments such as Gold and Silver suffering tremendously due to the global markets leading to such instability. Infact some investors have experienced great amounts of losses with the current situations especially the signs of no signs of the markets to take off sooner than the Budget 2016 and its repercussions. These losses cannot be recovered in the running fiscal of at least what is left of it. But there is something that might be a little less disheartening and that is the taxes.

Taxation Silver Lining on Losses in Asset and Equity Market:

Tax laws in India suggest that, the word capital gains might come to rescue. Infact the capital losses is something especially in the long-term investments will bear the simple fact that your taxable income, due to the heavy losses have naturally slid and that too drastically. But first it is important to understand the difference between short term and long term investments in asset markets. For gold and real estate investments 3 years and over are taken as long term investments and anything less is considered short term. When it comes to debt, mutual funds and the stock market 12 months is the benchmark time. Any tenure lower than a year is short term while the opposite is considered long-term. Hence the losses made in short term investments as defined by the time periods mentioned earlier may be considered against both as a long term or short term investment. Long term losses in investments on the other hand will however can be only set against long term investments.

To get a better understanding of how it affects your income tax read the following slab:

  • For shares that have been listed the short-term capital gains tax rate is calculated at 15% whereas for long-term capital gains that taxation is 0%. Hence, making you liable for no tax at all.
  • For equity mutual funds the short term capital gains are calculated at the rate of 15% against and for long-term capital gains again the tax is not levied at all.
  • For FMPS as well as debt mutual funds, the short-term capital gains taxation is calculated at 33. 6%, whereas the long-term capital gains tax is computed at the rate of less than 10 percent of non-indexed entities and 20% of the indexed entities.
  • For real estates and gold long-term capital gains tax is computed at the rate 20% of the indexed entities, whereas for short-term capital gains taxation is calculated at 33. 6%.

All the taxation is calculated on only those assets which have been sold in that fiscal year a set of equities or Gold ETFs. So, if there are shares that are yet to be sold post Budget 2016, one does not have to consider those. To gain from your losses when it comes to your taxes, you have to keep it in mind to book capital gains which can be considered short-term investments only. You need to closely analytically study and determine whether the assets in question are to be kept or sold. The fundamental idea at the moment is to minimize your tax liability.

How To Reduce Tax Liability with Losses (Example)?

Let us take Mr. Sharma’s portfolio for an example to illuminate this strategy. He has a portfolio that is worth Rs. 20 lakhs which is invested in stocks and mutual funds. He made these investments around 2007 and 2008, when he had a lot of money but the global markets were hit with recession.

But with the recent losses in the equity market, he made a loss of approximately Rs. 6 lakhs from his portfolio. He is now left with Rs. 14 lakhs and he is expecting that in a few years he will be able to gain back his losses, which has a very high chance of happening. But due to the loss experienced this year, he is not being taxed at all on his current portfolio and for the fiscal year.

He could just sell off some his investments and create a new investment portfolio altogether, completely fresh. We also are aware that what one earns from a real estate sale, if immediately invested on a new real estate asset, will immediately allow this amount to stay tax-free.

However, all this a matter of timing and the will to make these quick re-investments. One cannot simply create a guaranteed and full-proof plan to gain back their losses but they can surely utilize to save some more expenses such as taxes if they can possibly be done strategically and ethically.

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