I am a part-time investor, investing in shares and units of mutual funds on long-term basis. I also do trading of shares including some intra-day trading, where I square off my transactions without taking delivery. Can I adjust my trading losses against gains arising from investment?
In my view, you are doing three activities — investing, trading and speculating. An investment activity is where you invest with a longer time horizon in mind. The intention is to enjoy appreciation over a period of time, to earn dividend, and to enjoy bonus and rights. Depending upon the period of holding, gains arising on sale of such investments are treated as long-term or short-term capital gains.
Trading is taxed as a normal business. However, you are also carrying on intra-day trading, wherein you are not taking or giving any physical delivery of shares. Such transactions are speculative in nature.
The following rules govern set-off of income from one head against another head of income:
a). Long-term loss if any in investment activity can be set off only against long-term gain.
b). Short-term loss can be set off against both short-term as well as long-term gain.
c). Speculative loss has to be adjusted only against speculative income.
d). Trading loss can be adjusted against any income including speculative profits or capital gains (both short term or long term).
e). Unabsorbed loss can be carried forward for eight years to be set off against the respective head.
It is advisable to keep separate accounts for the three activities to ascertain profit or loss from each activity.