Tuesday, March 10, 2009

How does Short Term Capital Gain/Loss work?

I found this interesting snippet circulated through email by ICICIDirect, which describes in simple anecdotes how Short Term Capital Gain/Loss works in India. I am posting it straight away, without any modifications.

1. Mr. Sharma purchased some securities on May 7, 2008 at a total cost of Rs. 100,000. On July 3, 2008, he sold these securities for Rs. 130,000. Here the Short Term Capital Gain, STCG (gain arising from sale of securities which is less than 12 months old) was Rs. 30,000 (a) and STCG tax (15% as per current laws) for this gain calculated to Rs. 4,500.

2. But Mr. Sharma had also purchased securities worth Rs. 90,000 on June 12, 2008 and had sold them at Rs. 40,000 on February 10, 2009. Hence there is a Short Term Capital Loss (loss arising from sale of securities which is less than 12 months old) and equal to Rs. 50,000 (b).

3. Now as per the tax laws, Mr. Sharma’s Short Term Capital Gain (a) is offset by Short Term Capital Loss (b). Hence there is no Short Term Capital Gains tax payable by Mr. Sharma for the financial year 2008-09. Also, he carried forward Rs. 20,000 loss for offsetting any Short Term Capital Gains he makes in the next 8 years.

Thus a person needs to pay STCG tax only for the difference between Short Term Capital Gain and Short Term Capital Loss if the difference is positive; no tax if the difference is zero or negative. Moreover, if the difference is negative, he can even carry forward and offset the loss to gains in the next 8 years, until the loss is completely used off to offset those gains.

Thanks to ICICIDirect.com

26 comments:

Anonymous said...

Point 2 is confusing as purchase 90000 - sales 45000 will bring 45000 as loss and not 50000 as calculated. Am i missing anything?

Sujith C said...

> Anonymous
Hey, thanks very much for pointing it out. I have corrected it..

Vivek Singh said...

Hi Sujith

I find your blog pretty interesting. Explaining finance to a layman is a challenge and I would love to read what you write here...

Ashish Financial Services said...

Good post, highly informative...
Thanks.

Payday Loan Online said...

Oh! What am informative informative post.Which I must confess has given some kind of insight into the Indian money economy and how the money market works.

raghu said...

hey guys,does the above Short Term Capital Gain tax apply to non salarised person??(i am a student) ...pls help

FundsM said...

nice article.

FundsM

Joseph said...

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Thank you for posting this. now I understand How Short Term Capital Gain/Loss work.

inheritance advance said...

The basic rules for this are the ff:
First, capital losses are used to offset capital gains.
Second, $3,000 of a capital loss can be used to offset ordinary income.
Third, any capital loss that is not used in the current year can be carried over indefinitely to offset future capital gains.

Wonga said...

I am glad to read such informative post about short term capital and procedure how it works.This information also reveals how our economy works.

ganawil said...

Short term capital gains are taxed on the investor's ordinary income tax rate. Short term capital gains are held by the investor for less than one year.

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Dale said...

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You've shed some light with regards to the process behind short term capital gain and loss, and did so eloquently and in a simple way. I hope more people would read this.

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Explaining finance to a layman is a challenge and I would love to read these financial tips thanks for poining out.

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This is one of the instances where you will be able to avoid paying taxes because of the loss. It is important to know these tax laws and use them to your advantage.

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Options Trading said...

Thanks for the explanation. These terms are sometimes confusing.

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PENNY STOCK INVESTMENTS said...

Not a bad explanation

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