Can short-term capital gains be adjusted against long-term gains? Check out these tax-saving strategies

In India, if you are an investor or trader in the equity markets, you must understand the interplay between long-term and short-term capital gains. This is crucial because it will help you optimise your tax liabilities.

Recent tax changes, market dynamics and regulatory updates have intensified the discussion of how these gains are treated. Let's discuss these concepts in detail.

Present tax regulations for capital gains

As of fiscal year 2025-26, the capital gains in India are decided based on the holding period of the assets:

• Short-term capital gains (STCG): STCG arises from the sale of assets held for less than 12 months. For listed securities, such as stocks, which are subject to Securities Transaction Tax (STT), STCG is charged at 20 per cent.
• Long-term capital gains (LTCG): This capital gain pertains to assets held for more than 12 months. In this case, there is no tax on gains up to ₹1.25 lakh in a financial year. Further, once the gain crosses this figure, the additional gain is taxed at 12.5 per cent without the benefit of indexation.

How is the adjustment of capital gains and losses allowed in income tax?

There are specific provisions in the Income Tax Act of 1961 for setting off a capital loss:

• Short-term capital loss (STCL): STCL can be offset against both STCG and LTCG within the same financial year. Unadjusted STCL can be carried forward for up to a period of eight years, allowing future possibility of offsets against any capital gains.
• Long-term capital loss (LTCL): It is important to remember that long-term capital loss can only be set off against long-term capital gain (LTCG). It cannot be set off against STCL. Further, similar to STCL, unadjusted LTCL can be held on and carried forward for eight years to offset any future LTCG to bring down tax liability.

Note: The tax provisions discussed above are indicative in nature only. Please consult your tax advisor for complete clarity on these provisions.

How to plan and strategically deal with tax-loss harvesting?

Now to combat the market fluctuations, corrections and volatility due to global inflation and the threat of Trump tariffs, you can deploy tax-loss harvesting techniques to save on taxes:

• Taking losses: By selling underperforming assets to incur short-term capital loss (STCL), you can bring down their tax liability.
• Offsetting gains: The incurred STCL can be utilised to offset taxable LTCG from profitable investments, thus lowering the overall tax liability.

This simple tax-loss harvesting technique can provide effective remedies for proper tax management and planning, especially during market volatility and downturns.

What have been the recent regulatory updates?

Effective July 23, 2024, the Union Budget introduced several important changes:

• Exemption limit increased: The exemption limit for LTCG on equities was raised to ₹1.25 lakh.
• Uniform tax rate: A standard LTCG tax rate of 12.5 per cent was put across all asset classes. This was done to eliminate prevailing disparities and confusion.
• Indexation benefit abolished: The benefit of indexation for calculating LTCG has been abolished, thus simplifying the calculation process.

Complex tax regulations

Hence, understanding the complexities of capital gains taxation is crucial for sensible financial management. It is even prudent to reach out to a certified financial planner or tax consultant to clearly understand the tax changes and implications.

The Income Tax Act is ever-evolving, and hence, by leveraging the provisions for settling losses and staying updated on regulatory changes and updates, you can strategically plan and manage your portfolio accordingly. This way, you can also bring your overall tax liability down.

Disclaimer: The tax provisions mentioned in this article are for informational purposes only and do not constitute financial or legal advice. Please consult a qualified tax advisor for personalised guidance based on your financial situation.