Loss or gain

TAX QUERIES

The answer is no for setting off long- term loss on listed shares. This is because the long- term capital gain on listed equity shares sold on a recognised stock exchange with complete Securities Transaction Tax (STT) fully paid is exempt under section 10(38) of the Income Tax Act.  But you will not get set off benefits of losses on sale of equity shares and, such loss will be treated as non tax deductible. The rationale here is that since the long-term capital gains are tax exempt, even long term capital loss should get similar treatment and not be set off against any other income. Therefore, the loss you incur will not be available for any tax relief nor any carry forward. It just lapses.  There is no provision under the Income Tax Act allowing you to set off short- term capital loss on sale of shares against long-term capital gain. This is because long-term capital gain on listed equity shares in any case is totally exempt and therefore there is no point reducing that income.  However, your short-term capital loss can certainly be available for set off against your long-term capital gain on sale of house property, since such long term capital gain is taxable. The quantum of your taxable long-term capital gain on house property can be reduced by the amount of short- term capital loss on sale of shares.  Having returned from the US, I have recently joined an MNC at a salary of around Rs 12 lakh per annum. Recently, a sales executive from a leading private sector bank approached me with a car loan for a Honda Civic at a concessional rate of about 10 per cent. The sales pitch is based on the fact that the interest amount of about Rs 1 lakh on the loan would be tax deductible. As a bonus, I would even get the benefit of depreciation of 20 per cent per annum. However, he tells me that I have to show some income as professional fees so that I can be classified as a person having a 'business or profession'. Under this, I am told, I would be eligible to claim tax benefits on the interest as well as the 20 per cent depreciation on the car. Also, if I make any loss then the negative figure will be set off against my salary income for the current year thereby, helping me to save a lot of tax.

- Tarun Vora, Mumbai

The whole proposal is to take you on a great ride. The Income Tax Act has already been amended to prevent such transactions. Section 71(2A) prohibits setting off of loss under the head 'business' against 'salary' income, with effect from assessment year 2005-06. Accordingly, you need not take the loan for the motor car, since you will neither get deduction for interest nor depreciation against your salary income.  My income is Rs 2 lakh per annum from salary and I invest in equity market for that extra income. Will this income be taxed under the short-term capital gains and as well as long-term capital gain? I am told that there would be 10 per cent tax on short-term profit and zero, if I hold them for over a year. Also, for the salaried, one has to include the said capital gains (both long and short-term) in the gross income for the concerned year. Then, how does one get exemption of long-term capital gains?

Ajay S. Rawat, Garhwal

Your short term capital gain on listed equity shares is taxable at the flat rate of 10 per cent under section 111A of the Income tax Act, 1961 while the long term capital gain on similar shares is totally exempt under section 10(38).  The period of holding of equity shares is more than 12 months for long- term and less than 12 months for short-term. Only listed equity shares sold on recognised stock exchange will qualify for concessional tax treatment of 10 per cent.  The writer is a chartered accountant