Wednesday, March 07, 2007

How to make your tanking stock work for you?

Yes. There is a way you can make your loss making shares save taxes. In India, short term capital losses can be offset only against short term capital gains. The long term capital losses can be offset only against long term capital gains. Given this, there is no 'use' (apart from cutting losses) of booking long term capital loss.

So, If you are sitting on capital losses then don't let it turn LONG TERM. At the stroke of an year book the losses. This can be now offset against the short term capital gains (if any). You saved 10% there.

If you bought 100 shares of Ranbaxy at Rs 510/- per share on June 1st 2004. Then by March 25, 2005 you have accrued a tidy sum of Rs 30,000/- as short term capital gains [by some other intelligent investing]. You would have to pay Rs 3,000/- as tax on that amount. But alas, your Ranbaxy has plummeted to Rs 325/- per share. You are sitting on Rs 18,500/- of losses. But if you book the loss in March 26th, 2005 then your net short term gain has been reduced to Rs 11,500/- which attracts a tax of just Rs 1,150/- A gain of Rs 1,850/- right there. Too bad about your loss though.

If you really are bent on having Ranbaxy in your portfolio (and not ready to wait for the real bottom) then buy it the next day. You would have saved Rs 1,850/- by just accounting.

On the other hand, if you hold Ranbaxy continuously beyond June 1st 2005 then and even if the stock price is Rs450/- per share (greater than Rs325/- per share as in March 2005) your loss of Rs 6,000/- would be long term capital loss. This Rs 6,000/- can not be offset against any short term capital gains made by you from April 1st 2005 to Mar 31st 2006.

No comments: