We know how hard it is to make money out of share markets. It takes so much of bearing with the stress of ups and downs in markets, risk of losing invested capital and the pains of research to find a suitable share to invest.
When we succeed in making profits on our invested capital, there comes the income tax department asking to pay income tax on those profits. Tax rules make it mandatory to pay the income tax on short term capital gains at a rate of 15%. The long-term capital gain is charged at the rate of 10% above 1 lac gains.
Short Term Capital Gains are the gains you earn on securities by buying and selling these securities within a period of one year. Long term capital gains are the gains earned on a security when you buy that security and sell it after one year period of time.
A trader or investor coming under the purview of tax liability because of short term capital gains may feel that while I am being asked to share my profits as income tax, but nobody is there to give me some relief when I suffer from the losses on my shareholdings in markets.
It is important to be aware of that you can always use your trading losses to save tax. Current Income Tax provisions allow you to do that. You can reduce your income tax liability by offsetting those losses against the profits you earned.
While adding your income from short term capital gains to your total income for tax calculation purposes, you can subtract the losses you incurred on trading during that period. Only the difference between them is added to your total income.
Suppose you have a short-term capital gain of ₹ 5000 from one of your trade or investment while you incurred loss of ₹ 2000 on another trade or investment, you need not to show your income as ₹ 5000 buy you may show it as 5000 – 2000 = ₹ 3000. Taking these figures into consideration, you can save ₹ 300 income tax.
It needs to be remembered that you can offset short term capital losses against the short-term capital gains only. You can’t adjust short term losses and gains against long term losses or gains or any other kind of gains.
The law also permits you to carry forward your short-term losses to next year, up to next 4 years at the maximum. This is a good thing from tax authorities for traders to lessen their income tax burden on income from securities.
Every trader or medium-term investor should be aware of this provision and enjoy the benefit for tax saving.