Your losses can actually reduce your income tax; here's how

Mumbai: If you invest in capital assets and incur losses, the Indian income tax law provides you some relief. When you invest in property, equities, gold, bonds, mutual funds etc., it is referred to as investment in capital assets. In case of a loss due to investment in these assets, here is how you can benefit from it, and reduce your taxable income.

Losses from property

Losses from house property can be set off against the income received from other house properties or against other income. Such set-off is allowed for a period of 8 years from the time you incurred losses. If the loss is carried forwarded to next year, such loss can be set-off under the head ‘Income from house property’ only and it’s not allowed to be set-off against any other head.

Losses from equities

Losses arising from investment in equities or equity oriented mutual funds can be set off against the capital gains made in subsequent years. Such losses can be carried forward for a period of 8 years as mentioned in the previous case. In case of equities, losses arising from investment horizon within one year fall under short-term capital loss, while any investment over one year fall under long-term capital loss. The rules dealing with each type of set is as follows.

Losses arising from short-term investment can be set off against gains from short-term or long-term investment. This can happen in the same year or subsequent years.

Losses arising from long-term investment can be set off against long-term capital gains only. Till a year back, there wasn’t any long-term capital gain tax. Hence, there wasn’t any point in setting off your long-term capital losses. With the long-term capital gains from equities also coming under the tax net, it makes sense to set off your long-term capital losses against the gains from long-term investments.

Losses from debt

In the case of debt securities or debt-oriented mutual funds, the rules are the same as in the case of equities. The short-term capital losses can be set off against short or long-term capital gains. Long-term capital losses can be set off against long-term capital gains only.

Benefits of set-off

The obvious benefit is the reduction in your tax liability. For instance, you made a loss of Rs. 2 lakh in the previous year. But, this year the capital market was better and you made a profit of Rs. 12 lakh. The bad news is that this will make you worried as your tax liability will increase. The good news is that you can set off the losses from last year against the gain of Rs. 12 lakh this year, which will make taxable capital gains Rs. 10 lakh only.

Points to keep in mind

While setting off your losses is a wonderful thing, you should avoid taking losses in order to save taxes. Many investors sell loss-making investments before the end of the financial years to save on capital gains they made. Little do they realise that the loss-making investments may turn out to be profitable in future. However, if you have made a genuine mistake in choosing a loss-making investment, you should sell it immediately.

(Written by Navin Chandani, CBDO of BankBazaar.com)