Income tax

How to reduce income tax by reaping losses in a weak stock market – explained

Income tax calculator: After the bloodbath of Friday’s session, the Indian stock market has come under downward pressure over the past four sessions. But, this weakness in the stock market can be turned into a great opportunity by investors paying income taxes. They can reduce their income tax expenses by reaping the losses.

According to tax and investment experts, if a taxpayer has made substantial gains in that fiscal year, they can book losses on their stocks that are trading below their average purchase price and offset the capital loss with capital gains while filing their income tax return (ITR) for the 2022-23 fiscal year.

Tax and investment experts added that harvesting tax losses would also help the investor reduce the risk of further losses in a weak market. They advised income tax payers to take a new position in the counter after another drop in the stock and hold it for the long term. However, they advised taxpayers to avoid timing the market after accounting for the loss of their stock positions.

Speaking on how one can reduce income tax by reaping losses in a weak stock market, Aarti Raote, Partner at Deloitte India, said: “Income tax provisions allow an individual to deduct a capital loss from the capital gains for the year. Thus a taxpayer who has realized substantial capital gains during the year could sell shares in his portfolio when the prices of the shares fall sharply and are expected to fall further. The loss suffered on these shares can be offset by the gains realized on other transactions. only helps the taxpayer to reduce tax outflows but also eliminates the possibility of further losses in case of stock price declines and balance the risk on his portfolio.While using this option, however, one should keep in mind bear in mind that short-term losses can be offset by short-term losses. -long-term and long-term gains, but long-term losses can only be compensated by long-term gains. It is therefore important to sell the right type of shares.

Rules for collecting tax losses

Explaining tax loss harvesting rules for taxpayers, Vinit Khandare, CEO and Founder of MyFundBazaar, said: “By investing in equity funds, an investor is known to realize capital gains – taxable depending on the length of time they remain invested in the particular fund.However, in reaping tax losses, the investor sells their fund shares/units at a loss to reduce their capital gains tax liability – a lucrative method of offsetting the capital gains realized on the equity by the capital loss incurred to pay a lesser amount of tax. , a few factors should be kept in mind in the collection of tax losses – a long-term capital loss can only be offset by long-term capital gains.”

The MyFundBazaar expert said that the investor cannot offset long-term capital losses against short-term capital gains. While short-term capital losses can be deducted from short-term capital gains or long-term capital gains – a method of offsetting capital gains realized on equity by the capital loss incurred to pay a lesser amount of tax.

Don’t try to time the market

On the caveat one should follow when harvesting losses, Rahul Agarwal, a certified financial planner, said, “While harvesting tax losses, one should not try to time the market. can result in a waste of the entire fiscal year.He advised taxpayers to book losses in their bleeding portfolio stocks and take a new position in the stock after another drop that offsets their brokerage and taxes paid while doing more and less of the existing position.

Areas where loss harvesting can be applied

Speaking on sector stocks where a taxpayer may try to reap losses, Manoj Dalmia, Founder and Director of Proficient Equities, said: “In a weak stock market, taxpayers eager to lose crop may experience losses in their portfolio stocks in metals, large-cap IT and the oil and gas sector.

Disclaimer: The opinions and recommendations made above are those of individual analysts, experts or brokerage firms, and not of Mint.

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