As the end of the financial year approaches, the demand from retail investors and high net worth individuals for book entries showing a loss in capital market transactions has resurfaced.

Market sources said investors who have made profits in the course of the year are now rushing to buy "loss entries" to offset their profits for the year.

Such has been the rush with brokers that the latter have started charging a premium of 3-4 per cent on the value of the entry, a source said.

How it is done

An investor, X, makes a profit of Rs 1 crore in capital market transactions His short-term capital gains tax liability works out to Rs 30 lakh Instead of paying the entire tax, the investor books a loss by getting a dummy entry The same dummy entry is then reversed on a later date

Brokers said the rush this year exceeds all previous year's records since most investors have made huge profits in the current bull run.

The benchmark Bombay Stock Exchange Sensex appreciated nearly 100 per cent from its low of 2,924 in April 2003 to an all-time high of 6250 in January 2004.

A leading broker on condition of anonymity said, "There has been huge demand for loss entries from our clients which has become a difficult task for us to fulfill."

An NSE broker also confirmed there was a mad rush for loss entries. To meet this demand, brokers are now turning to the derivatives segment, unlike in previous years where they could manage to get entries in the cash segment alone.

The modus operandi is simple. Say an investor, X, has made a profit of Rs 1 crore (Rs 10 million) in the current bull rally. So his short-term capital gain tax liability works out to Rs 30 lakh (Rs 3 million).

Instead of paying the entire tax, the investor books a loss by getting a dummy entry. The same dummy entry is then reversed on a later date by the broker in the stock exchange.

The broker who manages a dummy entry buys a call for an investor who wants to book a loss. And when the prices fall the premium on the call reduces, and the investor's entry is reversed at a lower price, thus showing losses on his account. Also the premium keeps on falling closer to the expiry date.