What to do in case of business or investment loss: how to compensate for losses to reduce taxes, manage finances

Over the past two years, the pandemic has seen various small and medium-sized businesses shut down or suffer huge financial losses. Whether it is a business or an investment, whether due to external factors or a bad strategy on your part, the resulting losses can be devastating and can turn your personal and professional life upside down. . Therefore, it is a good idea not only to be prepared for such a situation, but also to learn how to deal with it if it occurs.

Be prepared for the worst

If you are in a business or in risky investments, assume that at some point you could suffer financial losses. Here’s how to prepare for such an eventuality:

To diversify: Don’t put all your eggs in one basket. Always invest 20-30% of your holdings in different financial instruments such as gold, debt and stocks, so that your personal and family life does not suffer in the event of a huge loss. “This is especially true in the case of market-linked investments in the current situation, when the markets are at an all time high,” says Pankaaj Maalde, Mumbai-based financial planner. Agree with Dinesh Rohira, Founder and CEO of 5nance.com: “Never mix business capital with personal assets. By using the latter to capitalize on the former, you run the risk of impacting your family and financial goals.

Emergency fund: This is a basic requirement for any household, especially if you are self-employed or engaged in risky investments. “You need to have emergency funds to survive for at least six months,” says Rohira. “If not, make sure you have other investments and assets that can be liquidated, should the need arise,” he adds.

Health insurance: You should also have adequate medical coverage of 5-10 lakh because if you or a member of your family fell ill when you suffered a huge monetary loss, at least your medical bills would be taken care of. Insure your loans: If you have taken out big loans like a home loan, make sure that they are covered, so that if you suffer a huge financial loss and cannot continue with EMIs, at least the loan can be reimbursed.

Take stock of the situation

Instead of a knee-jerk reaction, you will need to consider the reason for the losses and take the appropriate steps to reinstate yourself.

Do not panic : First, don’t make a bad situation worse by panicking and making an impulsive decision, whether it’s losing a business or losing an investment. Redeeming your fund shares or selling a stock when the market crashes can hurt your long-term earnings if you don’t look at the big picture and ignore the reason for the loss. fall.

Cause of loss: To move forward, it is essential to assess the reasons for the loss. “For example, in a business you need to know if it’s external factors that are to blame or if your own strategy is flawed and your inability to follow the business plan,” Rohira explains. If the causes are macro or external and beyond your control, there isn’t much you can do about it.

If this is your wrong strategy, especially when investing, consult a financial planner. For example, if the markets are high as they are now, and you continue to postpone profit recognition, you may experience a loss if the market suddenly falls. However, if this is a market correction and you have invested in a mutual fund for a long term goal, don’t worry and keep investing.

Develop a strategy and move forward: If your business has been bleeding for a long time and no external factors are to blame, you will either need to bring in a business expert or leave the company and find a job or try something else. If, on the other hand, external factors are involved, such as the pandemic, you will have to weigh your options, especially if you are paying rent and staff salaries. If you want to continue in the same line, you can take a break and improve your skills, or maybe monetize your hobby and start over with another profession.

Compensate for losses to reduce taxes

There is a small silver lining if you experience capital loss in a business or investment. You can offset them with capital gains and reduce your tax liability. However, losses can only be offset by a particular type of capital gain and whether it is short or long term. So if you redeemed money from equity funds in less than a year and suffered a loss, you can charge it against a long-term gain of the funds in the next fiscal year. . If you did not realize any gain in that fiscal year but filed your income tax returns by the due date, you can also carry forward your losses, depending on the type of loss. For example, in the event of loss of real estate, you can carry it forward for eight years, but only four years in the event of loss in speculative activity.

Source link

Leave A Reply

Your email address will not be published.