Our columnist gives tips on how to set-off capital losses
Mrs Taxpayer sold shares of companies XYZ and ABC for a consideration of Rs 5 lakh and Rs 4 lakh, respectively. She had purchased XYZ in FY00 for Rs 1 lakh and ABC in FY92 for Rs 1.2 lakh. She has a carried forward loss of Rs 1 lakh. She is struggling to work out her tax liability highlighted in Table-1. This gives her the basic data and tells her that her tax liability, without the set-off of the loss, is Rs 68,000.
She now wants to claim the set-off and is struggling hard, not knowing the method of set-off. Let us help her.
In the case of shares and units she has the option to pay tax at the rate of 20 per cent on capital gains arrived at after indexation or 10 per cent on profits worked out without indexation. In her case, the 10 per cent option is more advantageous than the 20 per cent one for both the scrips. It is this option that has created the confusion.
The confusion is further confounded because the loss is to be subtracted from the capital gains arrived at after indexation whereas the tax is to be paid at the rate of 10 per cent on profits without indexation. To be able to do so, all she has to do is to subtract the loss of Rs 1 lakh from the capital gains with indexation of one of the scrips. Let us say we choose the company XYZ for the set-off. We find that the capital gains reduces from Rs 390,488 to Rs 290,488. Apply simple arithmetic. If the capital gain is Rs 390,488 the profit is Rs 400,000.
Therefore, if the capital gain is Rs 290,488 the proportionate profit works out to Rs 297,564 (= (400000/390488)X290488). The tax payable at the rate of 10 per cent thereon works out to Rs 29,576. The total, including the tax on the capital gains of ABC company, is Rs 57,576.
Is this the best that Mrs Taxpayer can do? To arrive at the answer let us choose the other scrip, ABC, for the set-off of the loss. Her tax liability is reduced from Rs 57,756 to Rs 48,435, just by choosing the right scrip for the set-off. It is the order in which the scrips are chosen that makes material difference.
Well, this is a simple example involving only two scrips. What if there are more? Follow the following rules step-by-step.
* Ascertain the tax liability at the rate of 10 per cent and 20 per cent.
* Choose the lower of the two.
* Calculate the ratio of this lower tax to the corresponding capital gain with indexation.
* Arrange the scrips in descending order of this ratio.
* Set-off the loss against the scrip with the highest ratio.
* The balance loss, if any, should be set-off against the scrip with the next highest ratio, and so on.
* The scrip that exhausts the total loss may be split up into two as indicated in our example.
* On the other hand, if there is a balance loss it can be carried forward for similar set-offs during subsequent years. This method ensures that the tax payable is minimised or the carried forward loss is maximised.
Finally, one more caution. The capital losses can be carried forward for eight successive years. Whatever cannot be set-off during this period is lost. Therefore, the assessee has to adjust the oldest loss first.
(The author may be contacted at anshanbhag@yahoo.com)
