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Swing as investors work tax math
March, 06th 2010

Market watchers are expecting some sharp swings in many small, and medium-cap stocks over the next few weeks, as investors try to balance their account books before the current financial year ends on March 31. Equity investors sitting on unrealised losses are expected to sell those positions and buy them back in the new financial year starting April 1.

Tax consultants recommend booking losses if the investments are less than a year old, and lowering tax liabilities for the current accounting year. The tax on short-term capital gains earned during the year can be set off to the extent of short-term capital losses.

If it (the loss-making equity investment) is nearing a holding period of one year, you would be better off selling them, since long-term capital loss cant be offset with short-term capital gain, says Vinod Ambavat, partner, Jain Ambavat and Associates.

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. In case, the gains are lower than the losses, the excess short-term capital losses can be carried forward and set off against capital gains for eight successive assessment years, say tax experts.

According to them, these losses can also be offset against short-term and long-term gains of non-equity assets like real estate, jewellery, debt mutual fund units, gold ETFs, etc. However, long-term capital losses on security transactions liable to securities transaction tax cannot be offset against any income, and cant be carried forward for offsetting against any future gains.

Analysts say because of the upswing in stock prices since May, there may not be a large number of stocks where investors would be sitting on huge losses like the case the previous year.

But there would certainly be some companies which have caused a hole in the portfolio of investors in the past few months. Investors should sell dud stocks in their portfolio and replace them with fundamentally sound ones, says Vishal Jajoo, research analyst, FCH Centrum Wealth Managers.

However, one should be careful of factoring in the transaction cost incurred on buying and selling of shares. Investors also need to bear in mind that the short-term capital loss first has to be adjusted with any short-term capital gains and only then with long-term capital gains on transactions not liable to securities transaction tax like sale of gold or real estate, among others, adds Mr Jajoo.

Many other countries, including US, have provision for this kind of tax treatment. However, there are restrictions in some cases. For instance, in the US, rules prevent investors from selling and buying back the same stock within 45 days for tax purposes.

In India, there is no such restriction. Many small-cap stockholders look for ways to avoid being taxed on non-profitable stocks. If they can sell these shares before the following year begins, their capital gains taxes should be lower, adds Mr Ambavat.

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