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Profits from losses

The short-term capital losses from equities and mutual funds can help you save taxes for up to eight years.

Print Edition: January 22, 2009

It's an ill wind, they say, that blows nobody good. Although 2008 was a nightmare year for the value of your investments, you could actually profit in tax terms. No, we aren't raving mad. Read on and see how it makes sense to buck conventional investing wisdom and turn your notional losses into real ones.

Short-term capital losses from equities and equity-based mutual funds can be set off against other short-term capital gains. This includes short-term capital gains from debt funds, gold and property. Even long-term gains from property and gold can be set off against these losses. “This is a good time to book short-term losses. Just sell your loss-making stocks and buy them again,” says Delhi-based financial consultant Surya Bhatia.

It is important to keep an eye on the calendar while doing this. The stocks and equity mutual funds in which you intend to book losses should have been bought less than a year ago. That's because after a year, the losses (and gains) become long-term capital gains. Since there is no tax on long-term capital gains from equities and equity-oriented mutual funds, there is also no provision to set them off against any other gain.

Setting Them Off
Use your short-term capital losses from stocks and mutual funds to offset the capital gains made from the following:
• Stocks and equity mutual funds bought less than one year ago
• Debt-based mutual funds
• Gold ETFs
• Gold and silver (other than jewellery and gold bonds)
• Real estate

Another thing to keep in mind is that the sale of assets are on a firstin, first-out basis. This means the shares you bought first will be deemed to be sold first. Assume you bought 200 shares in October 2007 at Rs 150 and another 200 at Rs 200 in February 2008. If you sell 200 now when the price is Rs 120, there won't be any short-term losses. That's because the shares you sell are those that were bought in October 2007 and you will only have long-term capital losses.

The best part about the deal is that the losses you book can be carried forward up to eight years. So, it doesn't matter if you are not able to fully utilise the benefit in 2009-10. That's one silver lining in the gloomy clouds of 2008.

Case Study

Vinay Acharya with family

Vinay Acharya (right), 29, Bengaluru

A software engineer, he invests in equities and incurred some real and some notional losses in 2008.

Income: Rs 40,000 per month

Investment details: Acharya plans to carry forward his losses of Rs 25,000 to the next year. He may sell some more stocks and turn his notional losses into real ones before the end of the financial year.

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