The investors who made profits when the Sensex soared from 16,000 to 20,000 but lost it later when the market tumbled to 12,000, were in for a surprise when they were asked to pay the short-term capital gains tax on the profits they made.

Many of them have not mentioned these profits in their income-tax returns for the year ended in March 2008. Tax consultants are advising investors to pay it as the income-tax department receives all the statements of stock transactions from the broking companies. Mr Prakash Thakur (name changed) a builder by profession invested Rs 10 lakh in the stock market in October-November 2007. When the market was bullish in January 2008 he sold the shares and earned a profit of Rs 81,000. Then, within two to three days he invested the whole sum in different stocks. Unfortunately, after this decision the Sensex tumbled and remained bearish for quite some time. The market value of the stocks held by Mr Thakur was reduced to Rs eight lakh from Rs 10.80 lakh. He decided to retain the stocks till the market went up. But he could not get the opportunity to book profits before March 31, 2008.

Later on Mr Thakur approached Mr Milind Agarkar, who is a chartered accountant by profession. Mr Agarkar adviced him to pay short-term capital gains tax at the rate of 10 per cent on Rs 80,969, the profit he made by selling shares in January 2008. Short-term capital gains can be set off only against short-term capital loss in the same financial year, said Mr Agarkar. And as Mr Thakur has retained the shares as on March 31 2008 he cannot ask for the set off, said Mr Agarkar. So, Mr Thakur had to pay Rs 8,096 as short-term capital gains though he has accumulated losses in stock trading.

According to Mr Praful Chajed, president, Institute of Chartered Accountants Society of India, western region, investors should take a look at the total trading in the same financial year. They should then sell all the shares on or before March 31 to get a set off or they should pay tax on the profits they made, he said.

Mr Agarkar pointed out that thousands of investors have not mentioned their stock transactions while filing the income-tax returns as they had not earned profits by the end of the year. He said all the stock broking companies have to intimate all the transactions to the income-tax department and since the department has the information they could query the investors.

Many prefer to opt for portfolio management services (PMS) from asset management companies, said Mr Nikhil Naik, managing director, Naik Wealth. But investors should ask the company on a regular basis about the liability of the short-term capital gains tax while selling and buying the shares, suggests Mr Naik.