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Book losses to lower tax burden
March, 14th 2009

If you are sitting on unrealised losses on equity investments made less than a year ago, here is some consolation. Those unrealised losses can be used to lower tax liabilities for the current financial year.

Tax experts are advising investors to book their losses on or before March 31 this year and buy back those shares in the next financial year, beginning April 1.

By doing so, the tax on short-term capital gains, if any, can be set off to the extent of short-term capital losses. It may be noted that tax on short-term capital gains was increased by 15% from 10% with effect from 2008-09.

Brokers say this could trigger volatility in some stocks over the next couple of weeks, as investors try to balance their account books. Short-term capital losses for the year can be set off against any capital gains, short or long-term, reported under the head, income from capital gains, said Jain Ambavat and Associates partner Vinod Ambavat.

In case, the gains are lower than the losses, the excess short-term capital losses can be carried forward and offset against capital gains for eight successive assessment years, he said. However, Mr Ambavat said long-term capital losses on security transactions liable to securities transaction tax cannot be offset against any income, and cannot be carried forward for offsetting against any future gains. These losses can also be offset against short-term as well as long-term gains of non-equity assets like real estate, jewellery, debt mutual fund units, gold ETFs, etc.

Investors have to bear in mind that short-term capital losses first have to be adjusted with any short-term capital gains, and only then with long-term capital gains on transactions not liable to STT (like sale of gold, real estate, etc), added Mr Ambavat.

Investors in many other countries like the US book temporary losses for lowering tax liability subject to fulfilment of certain conditions. But there are rules that prevent investors from selling and buying back the same stock within 45 days for tax purposes.

In India, there is no such restrictions that forbids investors from benefiting from this. So, many small-cap  stock holders look for ways to avoid being taxed on their non-profitable investments.

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