I recently sold shares of different companies and made some profit and loss. How will I compute my tax liability?

I recently sold shares in three different companies and made a profit in some and a loss in some. I am sharing the details below; however, I am hiding the companies' names for confidentiality. Please guide me on how to compute my tax liability and whether I can set off my loss against profit. 

 1. Shares of A Company purchased in the year 2019 for Rs 8 lakh were sold for Rs 6 lakh, thus incurring a loss of Rs 2 lakh. 

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2. Shares of B Company purchased for Rs 15 lakh in the year 2021 have now been sold last month for Rs 16 lakh, thus making a profit of Rs 1 lakh. 

3. And finally, shares purchased in the month of February 2023 of C Company for Rs 8 lakh have been sold by me for Rs 11 lakh, thus earning a profit of Rs 3 lakh. Sir, please guide me. 

 Zafar Mohammad 

Reply by Rajiv Bajaj, Chairman & MD, Bajaj Capital Ltd. 

I wanted to provide you with a comprehensive understanding of the regulations governing the computation of capital gains or losses related to equity shares. The principles guiding these calculations are designed to be accessible and straightforward, facilitating ease of comprehension. 

In the initial scenario, the decision to sell shares from Company A after a holding period of 4 years, exceeding the minimum requirement of 1 year for long-term classification, resulted in a long-term capital loss of Rs. 2 lakhs. Conversely, the shares from Company B yielded a long-term capital gain of Rs. 1 lakh. Lastly, the sale of shares from Company C, completed before the culmination of a 1-year holding period, generated a short-term capital gain of Rs. 3 lakhs. 

Applicable to short-term capital gain on equity is a flat tax rate of 15%. Turning our attention to the long-term capital loss of Rs. 2 lakhs from the sale of Company A shares, it's essential to note that this loss can only be offset against long-term capital gains and not against gains of any other nature. Given that the gain from selling shares of Company B is Rs. 1 lakh, you can offset the long-term capital loss of Rs. 1 lakh against it. The remaining unabsorbed loss of Rs. 1 lakh can be carried forward for the next 8 financial years, providing an avenue for utilization against any long-term capital gains incurred during that period. 

To ensure clarity, it is imperative to bear in mind the following rules: 

Short-term capital loss is versatile and can be offset against any capital gain, regardless of its short-term or long-term classification. 

Long-term capital loss, however, is restrictive and can only be set off against long-term capital gain. 

These rules serve as a foundational guide in navigating the complex landscape of capital gains taxation, underscoring the importance of a nuanced understanding for effective financial planning. 

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Furthermore, I would like to draw your attention to the critical requirement of filing your Income Tax Return (ITR) on time. Timely submission is not only necessary for setting off the long-term capital loss of Company A against the long-term capital gain of Company B but is also a prerequisite for carrying forward any unabsorbed losses. Failure to adhere to the stipulated timelines may jeopardize the potential benefits associated with these financial transactions. 

By meeting the deadlines for ITR filing, you ensure the proper utilization of available tax provisions, safeguarding your financial interests and optimizing the potential for minimizing tax liability. This adherence becomes particularly pivotal in the context of offsetting losses against gains, both in the present and in the future. 

The intricate interplay of regulations governing capital gains and losses necessitates a proactive approach to financial planning. By comprehensively understanding and diligently adhering to these guidelines, you position yourself strategically to optimize tax outcomes and secure your financial well-being.

(Views expressed by the investment expert are his/her own. E-mail us your investment queries at askmoneytoday@intoday.com. We will get your queries answered by our panel of experts.)