If you’ve booked losses on your stock trades this year, those red numbers might still deliver a green payoff, by cutting your capital gains tax.
Under Indian tax laws, short-term capital losses (STCL) from shares and other capital assets can be used to offset both short-term capital gains (STCG) and long-term capital gains (LTCG) in the same financial year. This rule gives retail investors a legal, built-in tax hack that could potentially reduce taxable gains to zero.
Here’s how it works: If you earned Rs 2 lakh as long-term capital gains but also incurred Rs 2 lakh in short-term capital losses, you can use the loss to offset the gain entirely. Result? Zero net capital gain and a tax saving of up to Rs 30,000, depending on the tax rate applicable to your gains.
The Income Tax Act specifies a set-off sequence:
1. First, apply STCL against any STCG.
2. If there’s still loss left, it can then be set off against LTCG.
3. Any remaining loss after this can be carried forward for up to 8 assessment years.
Importantly, capital losses can’t be used to offset income from salary, rent, business, or interest. These tax benefits apply strictly within the capital gains category.
Consider a real-life scenario: You made Rs 2 lakh in LTCG from mutual fund redemptions but lost Rs 1.5 lakh in short-term stock trades. You’re allowed to offset Rs 1.5 lakh of LTCG, bringing your taxable gain down to Rs 50,000, slashing your tax outgo substantially.
Missed the set-off this year? Don’t panic. If you file your Income Tax Return (ITR) on time, unadjusted STCL can be carried forward and used to reduce future capital gains for the next eight years. But if you miss the filing deadline, you lose this carry-forward benefit permanently.
To claim these tax offsets, documentation is key. Use the correct ITR form (usually ITR-2 or ITR-3), ensure all trades are correctly reported, and maintain contract notes and transaction records. Any mismatch or error could disqualify your claim or invite scrutiny.
In volatile markets, strategic tax-loss harvesting isn’t just for high-net-worth investors. Even retail investors can use it to smartly trim their tax bill provided they know the rules and file with precision.