Volatile Markets? Here's How To Make Your Losses Work And Save Taxes For You

In December 2024, nan Income Tax Appellate Tribunal (ITAT) successful Mumbai ruled that taxpayers tin group disconnected short-term superior losses against semipermanent superior gains (LTCGs). The determination underscored nan correct to morganatic taxation readying and marks a important alleviation for investors often scrutinised during taxation assessments. The ruling is peculiarly pertinent for banal marketplace participants who look challenges successful optimising their taxation liabilities amidst stringent regulations. 

Capital gains and losses originate from nan waste of superior assets, which are typically held for appreciation complete time. These assets see equity shares, communal funds, existent estate, and bonds. Tax laws categorise these gains arsenic either short-term aliases long-term, based connected nan holding period. Typically, short-term gains originate from assets held for little than 12 months, while semipermanent gains travel from assets held beyond this period. 

The ITAT's determination allowed short-term superior losses from shares held for little than a twelvemonth to beryllium offset against immoderate superior gain, whether short-term aliases long-term. However, semipermanent superior losses stay offsettable only against semipermanent gains. 

"With superior markets witnessing accrued volatility successful caller times, galore taxpayers find themselves juggling some gains and losses successful their finance portfolios. The Income Tax Act, 1961, offers a system yet nuanced system for mounting disconnected superior losses, which, erstwhile strategically applied, tin importantly trim one's taxation outgo. Taxpayers pinch some short-term and semipermanent superior losses successful FY 2025–26 tin optimise their superior gains taxation liability by pursuing definite rules," said CA Niyati Shah, Vertical Head – Personal Tax astatine 1 Finance.

Capital assets and taxes

The classification of superior assets into short-term aliases semipermanent varies pinch nan plus type. For instance, equity shares listed connected banal exchanges and equity-oriented communal costs are considered semipermanent if held for much than 12 months. Conversely, unlisted shares and immovable properties specified arsenic existent property are deemed semipermanent if held for complete 24 months. Debt-oriented communal costs acquired earlier April 1, 2023, required a holding play of much than 36 months to suffice arsenic long-term. However, specified communal costs acquired aft this day are ever considered short-term nether Section 50AA, irrespective of their holding period. 

Nature of Capital Gains and Losses

Capital gains are classified under:

Type Holding Period Example Assets Tax Rate (FY 2025–26)

Short-Term Capital

Gain (STCG) ≤ 12 months Listed shares, equity- oriented Mutual Funds 20%

Long-Term Capital

Gain (LTCG) > 12 months Listed shares, non-equity assets 12.5% (post-indexation, wherever applicable)

Accordingly, losses from specified transfers are termed short-term aliases semipermanent superior losses.

Rules of Set-Off: As per nan Income Tax Act, location are circumstantial rules governing nan set-off of these losses:

1. Intra-head Adjustment First: Set-off is first made wrong nan aforesaid caput of income (i.e., Capital Gains)

2. Short-Term Capital Loss (STCL): Can beryllium group disconnected against some STCG and LTCG (This elasticity makes STCL a valuable instrumentality successful taxation optimisation)

3. Long-Term Capital Loss (LTCL): Can beryllium group disconnected only against LTCG

4. Only if location is an unutilised loss, it tin beryllium carried guardant up to 8 appraisal years

Strategic Order of Set-Off for Optimal Tax Benefit

To guarantee minimal taxation liability, nan pursuing bid is recommended:

1. Utilise STCL First: Set disconnected short-term superior losses against short-term gains (taxed astatine 20%) and semipermanent gains (taxed astatine 12.5%) successful bid of a higher taxation complaint impact.

2. Apply LTCL Next: Since LTCL tin only beryllium group disconnected against LTCG, use this next. Important: Ensure nary STCL is wasted connected LTCG that could person been neutralised by LTCL.

3. Segregate Asset Types if Required: While superior gains are bucketed into ST aliases LT, nan type of plus - equity vs. non-equity - besides affects taxation complaint and exemption thresholds (e.g., ₹1.25 lakh exemption connected LTCG from listed equity nether Section 112A). Set disconnected must beryllium planned, keeping these successful view.

Carry Forward Rules

● Filing Deadline Compliance: Losses must beryllium reported successful nan income taxation return (ITR) revenge wrong nan owed day (July 31, unless extended)

● Loss Carry Forward Period: Both STCL and LTCL tin beryllium carried guardant for up to 8 appraisal years and utilized only against superior gains successful consequent years

Illustration: Mr. Fenil’s portfolio successful FY 2025–26:

Type Amount (₹)

Short-Term Capital Loss ₹3,00,000

Long-Term Capital Loss ₹2,00,000

Short-Term Capital Gain ₹2,50,000

Long-Term Capital Gain (listed equity) ₹3,50,000

Tax Optimisation Plan

● Apply Section 112A exemption: From LTCG of ₹3.5 lakh (listed equity), use Section 112A exemption of ₹1.25 lakh, taxable LTCG = ₹2.25 lakh

● Offset STCL: Use ₹2.5 lakh STCL to afloat offset STCG, past STCG becomes Nil. The remaining ₹50,000 STCL group disconnected against LTCG, Balance LTCG = ₹1.75 lakh

● Offset LTCL: Use ₹1.75 lakh LTCL to afloat offset equilibrium LTCG, past LTCG becomes Nil

● Carry Forward: ₹25,000 LTCL remains unabsorbed and tin beryllium carried guardant for 8 Assessment years if Income Tax Return is revenge wrong nan due-date

Outcome:

Component Before Set-Off After Set-Off

Taxable STCG ₹2,50,000 ₹0

Taxable LTCG (post-

112A) ₹2,25,000 ₹0

Tax Payable connected Gains ₹0 Nil

Carried Forward Loss – LTCL ₹25,000

Plan proactively, record connected clip

Understanding nan Income Tax Act's provisions connected superior nonaccomplishment set-off is basal for investors aiming to optimise their taxation responsibilities. Whether dealing pinch losses from equity shares, communal funds, existent estate, aliases gold, taxpayers tin strategically offset short-term superior losses against some short-term and semipermanent gains. 

"The cardinal to superior nonaccomplishment optimisation lies not only successful knowing nan set-off rules but besides successful their judicious exertion based connected taxation rates, plus types, and filing discipline. Investors should ideally consult their taxation advisors astatine nan extremity of nan financial twelvemonth to measure portfolio capacity and floor plan retired a loss-harvesting strategy if needed," Shah noted.