How you can save Tax on Stock Market Losses?

Every now and then, an occasional trade may land you on the wrong side of the share market. While it is common to bite some losses in the short term, some smart tax planning may also help you on save some taxes at the same time. The process is simple yet effective. You have to first sell the loss making shares in your portfolio and book the losses on them. Then next day, you can buy back the same stocks to keep your portfolio intact. The loss you make on such sale of shares bought less than 12 months ago will be adjustable against gains from other specific investments, including short-term capital gains from other share trades. These losses can also be set off against long-term gains from debt funds and Gold ETFs and jewelry. If you don't have any income from the above sources, you can still carry forward these losses for the next 8 financial years! Now, before you go all out on booking losses on your shares for tax gains, keep the points below in mind.

1. Double check your date of investments: As only short term capital losses can be set off in this manner, shares bought before 12 months are not allowed to be set off this way.
2. Share sales follow a FIFO basis: Your share purchases might have been spanned out over the year but remember the shares you bought first will be considered to be sold first. Suppose, you have bought 100 shares of a company in last year January and then 300 shares of the same company in August again. This means that selling 300 shares in March in the current year, 100 shares purchased in January last year will be considered sold first and therefore you will only be able to set off your losses on 200 shares bought in August.
3. Look out for the volatility in the market: Selling shares to book losses and buying them again the very next day with the intent of long term investment is a risky feat. The share prices may rise or fall by the next day. This leads to a tricky situation.

To get around this, you can buy more shares today (of the same company that you are going to sell) and then sell your original shares to book losses. This protects you from price fluctuations on some level. There is still a risk involved as the share price may fall further the next day and multiply your losses.

Some investors prefer the former, while others will swear by the latter technique.

It is advised that to further protect yourself from losses, you can sell shares in small lots over a period of a few days. This will mean that even if you incur a loss on any lot, it will be a very small loss that can be managed.

1. Ensure delivery of shares: If you look at tax saving through this route, ensure that you actually take delivery of shares i.e. do not conduct both buy and sale transactions on the same day (intra-day transactions). Intra-day transactions can be considered as speculation in the market by Income Tax and your claim of loss may be easily disputed. It is recommended, that you wait for at least one day between buying and selling to avoid such disputes.
2. Filing before due date: After having done all this, ensure that you file your return before the due date as only then the carry forward of your short term losses will be allowed by Income Tax.

So the next time you incur some losses in the market you can at least brush off some of your loss by saving on your taxes! Please also note if there is any probability of profit on the said shares then you must not sale the same as the long term capital gain will not be chargeable to tax.