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Worried about a Stock Market Crash? Don’t worry; make use of it to reduce tax liability.

 

It is that time of the year when tax planning becomes essential to reduce tax liability. Little bit of planning will help you to reduce your tax outgo on your share transactions.

 

Book loss and adjust against past profit if any and save tax.

You can reduce your tax outgo by setting off gains/loss made from equities in this year against gain/losses occurred in this year or previous year.

Current tax laws allow you to set off a short-term capital loss (STCL) against any short-term capital gains (STCG) or long-term capital gains (LTCG). Short term capital gain/loss arises when shares or mutual funds are held for less than year.

If you have neither STCG nor LTCG in the current year, you can carry forward the loss for a period of eight assessment years immediately succeeding the assessment year during which you have incurred the losses. 

The idea here is to use the short term capital Loss (STCL) in this equity market downturn by booking losses on existing holdings to offset against already earned profit if any. You can re-purchase the stock, thereby keeping your holdings intact and booking losses to offset against short term profit.

 

Example:

Mr. Ganesh has two stocks A and B whose current market value is 2,00,000 & 3,00,000 respectively. Suppose he has already booked short term profit (by selling within 12 months) of 40,000 in stock A and in stock B is incurring an un-realized loss of 35,000.

Right now Ganesh has to pay short term capital gains of 15% on 40,000 profit which he has made (assumption that no previous loss is carried forward) i.e. 6,000.

What Ganesh can do now? He can sell stock B where he has an un-realized loss of 35,000. So, his net profit will be 5,000 (Profit of 40,000 – loss of 35,000)

Thus he will pay STCG tax of 15% on 5,000 and not on  750.

He can buy stock B after selling it next day as well to keep his holdings intact.

He can also use the brokerage incurred as a cost and his taxable profit will be reduced by the amount of brokerage paid

 

Conservative investors can consider selling on March 31 and can buy the same stock the next trading day. The only risk involved in this transaction is that if the stock price or the value of the equity fund moves up between your sell and buy dates, you may lose out on interim returns. 

 

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About CA Prakash Chartered Accountant Bangalore

CA Prakash Chartered Accountant Bangalore
CA Prakash is a practicing chartered accountant and partner in Bangalore -based CA Firm. For further information or query, please email it to [email protected]