FY 2014/15 has been a great year for the markets with over 30% increase in the benchmark Nifty index. There have been stocks that have been multi-baggers and there have been laggards as well. With a few days left for the end of the financial year (31st March), I would like to share with you a way to optimize your post tax returns using a concept called “Tax Loss Harvesting”. This is quite popular among traders/investors who have access to specialist chartered accountants and tax planners.
We have made it easy for each one of you by creating your personal tax loss harvesting report on Q that can help you save as much as 30% of your trading profits, that you would have to otherwise pay as taxes.
Taxation while trading
Our post “Taxation Simplified” is probably the most popular post on the internet with over 1200 comments for all your basic queries on taxation while trading on the markets.
In the context of this post, a few things that you need to know:
- While trading the markets and filing your income tax, you can consider yourself a trader (business of trading) or investor.
- You are a trader if you partake in any F&O trading, intraday trading (speculative business), and/or trade equity delivery very actively as if it were a business.
- You are an investor if you trade only equity delivery once in a while.
- As a trader, your taxation is as per the IT slab (0-2.5 lakh: 0% | 2.5 -5 lakh: 10% | 5-10 lakh: 20% | 10 lakh > : 30%). So you sum up all your income (trading + any other income including salary), reduce all the expenses, and then pay taxes according to the slab you fall in. The good thing of declaring your trading as a business is that any expense incurred towards trading (internet bills, cost of advisory, financial newspapers, depreciation of your computer, and more) can be offset from your income.
- As an investor, any gain that you make in a stock by holding for more than 1 year (LTCG or long term capital gain) is exempt from tax. Any gain you make by selling your stock before 1 year (STCG or short term capital gain) is taxed at 15% of the gain.
- Do read our post on taxation simplified for a detailed explanation.
Tax loss harvesting?
Tax loss harvesting is an opportunistic way to bolster your post tax returns. It is the act of booking any unrealized loss to reduce the tax outgo on your realized gain before the end of a financial year.
As an investor, if you have any short term capital gains for the year you will have to pay 15% of this as tax. Assuming you have stocks sitting in your portfolio making a short term capital loss, you can book this loss, set it off against the gains, and hence reduce your tax outgo.
So assume you have made Rs 1 lakh in trading profits from your short term equity delivery trades. This would mean your tax liability is Rs 15,000 on this gain. If you had stocks in your portfolio which are making Rs 50,000 in short term losses, you can sell these and book the loss. So now your net profit for the year is Rs 50,000 and hence your tax outgo is Rs 7500 (15%), a saving of Rs 7500.
To make up for the stocks that you just sold to book losses, you can either immediately buy a similar stock or wait till those stocks are delivered from your demat to buy them back again. So if you sold ICICI Bank to book a loss on Monday, you can either buy say a HDFC Bank immediately for the same value or wait for Wednesday to buy back ICICI Bank again. So you continue to hold the same portfolio, but by doing this transaction you would have saved Rs 7500.
As an investor, long term gain is exempt from taxes, and hence you can’t use long term capital loss to adjust against short term gain. Only short term capital loss can be adjusted against short term capital gain.
Trader (Trading as a business)
As a trader, any gain is a business gain, and any loss is a business loss. So if you have net realized business gain (short term capital gain, long term capital gain, F&O profits) you may have to pay up to 30% as taxes based on the slab you fall in. This tax outgo can be reduced by realizing any business loss which would mean you could sell any stock where you are making either a short term or long term capital loss, and use this to reduce your tax outgo.
Once you have sold the stock, like explained above you can either buy back a similar stock immediately or wait for the stocks to be delivered from your demat and buy back the same stock again after two days.
So in the same example above, say 1 lakh was a business gain and say you are in the 30% bracket, that would mean a tax outgo of Rs 30,000. By booking Rs 50,000 loss, your net tax outgo will be 30% of Rs 50,000 which is Rs 15000. A saving of Rs 15000.
As a trader, your can set off any other business profits (any other income of yours excluding salary income) against this loss as well.
Note: You have to ensure that to book the loss for this financial year, you have to exit the stocks before March 31, 2015.
Tax loss harvesting report on Q
We have created for you a report on Q to easily spot any tax loss harvesting opportunity on your account with us. The report will give you a quick view on all your realized profits for the year, and all unrealized losses on your equity holdings which could be booked by selling the stock and hence reduce tax outgo on your realized profits.
See a sample report below on how by selling the 3 stocks and buying back again can save upto Rs 3000 in income taxes. We have spotted tax loss harvesting opportunities where clients can save lakhs of rupees that would otherwise have to be paid as income tax.
Psychologically it is tough to sell loss making stocks, and the typical reaction is to postpone the decision making. If you are someone who is sitting on realized profits, make sure to use any unrealized loss to reduce your tax outgo. Every penny saved is a penny earned, and following financial discipline is important for long term success in the stock markets.