Suffered a huge loss in the stock market, then saved 25 lakhs using this trick
A recent case has emerged that shows that losses incurred in stock market and mutual fund investments can help reduce tax burden. In this case, a Delhi resident reduced his taxable income by ₹2.5 million.
There's significant income tax news for those investing in the stock market and mutual funds. The Delhi Income Tax Appellate Tribunal (ITAT) has clarified that individuals who incur losses from stocks or mutual funds can offset these losses against long-term capital gains (LTCG), even if the tax rates on both are different. This decision was made following a case involving a Delhi resident.
What was the whole matter?
In this case, an individual had shown losses from shares and mutual funds in his income tax return. This included long-term capital losses from the previous year and short-term capital losses from the current year. He claimed to offset these losses against long-term capital gains from the sale of shares and mutual funds.
Why did the Income Tax Department stop it?
When the return was processed, the Income Tax Department blocked the set-off, stating that short-term and long-term capital losses cannot be set off against gains that are taxed at different rates. Consequently, the individual's income was inflated, adding approximately ₹2.5 million in additional taxable income.
After the appeal, the matter reached the ITAT.
The case initially went to the appeals level, but the tax department's decision was upheld there. The individual then approached the ITAT, Delhi. The tribunal thoroughly examined the matter and examined Section 70 of the Income Tax Act.
ITAT, Delhi, stated that the Income Tax Act's uniform calculation refers not to the tax rate, but to the head of income. This means that if both income and loss fall under the capital gains head, they can be set off against each other.
The tribunal clearly stated that the law does not require the same tax rate on losses and gains. Therefore, set-off cannot be prevented merely on the basis of different tax rates.
Why is the government not at a loss?
The ITAT also held that such set-offs did not cause any loss to the government. On the contrary, the loss at a higher tax rate was being offset against a gain at a lower tax rate. This meant there was no tax evasion or unfair advantage.
The tribunal also noted that previous decisions by tribunals in various cities have allowed capital losses to be set off against capital gains taxed at a different rate. This clearly demonstrates that the law is not intended to unnecessarily harass investors.
what was the final decision
ITAT Delhi quashed the order of the tax department and said that the person's decision to set off long term and short term capital losses against LTCG was absolutely correct, along with this, the amount of about Rs 25 lakh which was added to the taxable income was removed.
What does it mean for ordinary investors?
This decision has clarified the situation for investors in stocks and mutual funds. If you incur losses, you can legally reduce your tax burden by properly utilizing them. This decision is considered a major relief for tax planning.
Income Tax