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Even in the gloom and doom of the capital market, you can make a boom by planning some tax saving strategies!

      As a logical corollary to Section 10(38) of the Income-tax Act exempting long term capital gains (LTCG) arising from transfer of securities upon implementation of STT, long term capital losses (LTCL) arising from such security transactions are required to be ignored.  Short term capital losses (STCL) are however, eligible for set-off against STCG and the net STCG amount is taxed at the flat rate of 15.45%.


      Let us take a quick overview of the provisions relating to set off and carry forward of capital losses under the provisions of Sections 70, 71 and 74 of the Income-tax Act:

  • LTCL can be set off only against LTCG of the year and not against any other income.

  • STCL can be set off against STCG or even LTCG of the year, but not against any other income.

  • LTCL or STCL, which cannot be fully set off during the year, can be carried forward for set off against gain of any subsequent year in the aforesaid manner, for a maximum of upto 8 years.

      Taxpayers are aware of the fact that LTCL arising from any ‘off-market transaction’ is not eligible for exemption u/s. 10(38), since no STT is payable in respect of the same.  On the same analogy, if the LTCL arises to the taxpayer from any ‘off-market transaction’ (where no STT has been paid), such loss cannot be ignored and the same would be entitled to be set off against any other taxable LTCL of the year.

      Keeping in view the above provisions, let us consider some smart strategies that can be designed by a taxpayer for maximizing his tax savings:

Case Study-1: TP has sold a plot of land during FY 2013-14 in respect of which his taxable LTCG works out to Rs.15,00,000. The tax payable on this gain would work out at 20.6% under Section 112 of the I.T. Act.

With the steep fall in the Sensex, TP’s stock portfolio has also suffered an erosion of over Rs.30,00,000. If he now plans to transfer some shares through off-market transactions booking LTCL of Rs.15,00,000, he can set off the same against the LTCG and save tax of Rs.3,09,000 otherwise payable by him.

Although LTCG on shares attracts tax at 10.3%, TP can set off his LTCL from shares against the LTCG from land attracting tax at 20.6%, since there is no restriction in this regard prescribed under Section 70.

Case Study-2: MS has earned STCG of Rs.5,00,000 on sale of gold during FY 2013-14 which would attract tax at 30.9%, keeping in view his other taxable income of Rs.10,00,000 for the year.

If MS plans to sell in June, 2013, some of his shares purchased six months ago and book STCL of Rs.5,00,000, he can set off the STCG and reap a resultant tax saving of Rs.1,54,500.

Although STCG on shares attracts tax at 15.45%, the shares STCL can be set off against STCG from gold attracting tax at 30.9%, since Section 70 lays down no embargo in this regard.

Case Study-3: If in the above Case Study-2, MS has also earned STCG of Rs.5,00,000 on sale of shares, apart from the STCG of Rs.5,00,000 earned on sale of gold, he will have the choice of setting off the STCL of Rs.5,00,000 either against the STCG from shares or STCG from gold and the manner in which he exercises his choice would have a material bearing on the actual tax payable on the balance amount of taxable STCG of Rs.5,00,000, either at 15.45% or 30.9%.

In this case, relying on the clarification as contained in CBDT Circular No. 26, dated 7-7-1955, MS can opt for the more beneficial set off. The said Circular states that, “there is nothing in the section indicating that a particular mode of set off shall be followed. In the absence of any such indication, the general rule to be followed in all fiscal enactments is that where words used are neutral in import, a construction most beneficial to the taxpayer should be adopted. Hence, in such a case, the Department should adopt that mode which will give the taxpayer maximum benefits.”


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