Tax loss harvesting in India is a strategic approach to minimize tax liability by selling investments at a loss to offset capital gains. This tactic is gaining traction. How does it work, and can it boost your returns? Let’s break it down.
What Is Tax Loss Harvesting?
Tax loss harvesting in India is the practice of selling investments at a loss to offset gains from other assets. You can use these losses to reduce your short-term or long-term capital gains tax liability. Moreover, this is only applicable for capital assets like stocks, mutual funds, and ETFs. It is not allowed for speculative assets or intraday trades.
For example, if you sold stocks for a ₹1,00,000 profit but had a ₹40,000 loss in another stock, you can offset the profit, making only ₹60,000 taxable. This simple move can lead to significant savings, especially since short-term capital gains are taxed at 15% and long-term at 10% (without indexation) under Indian tax laws.
Benefits of Tax Loss Harvesting:
Implementing tax loss harvesting offers several advantages:
- Tax Reduction: By offsetting gains with losses, you can lower your overall tax liability.
- Carry Forward Losses: Unused losses can be carried forward for up to 8 years, providing future tax relief.
- Portfolio Rebalancing: Selling underperforming assets allows you to reinvest in better-performing securities, improving your portfolio’s overall performance.
- Strategic Planning: Helps in tax planning, especially during market downturns when many securities may be trading at a loss.
How It Works:
In India, capital gains are categorized into short-term and long-term, each with different tax implications. Short-term capital gains (STCG) are taxed at 20%, while long-term capital gains (LTCG) exceeding ₹1.25 lakh are taxed at 12.5%. For Example:
- Stock A: Bought for ₹1,00,000, sold for ₹1,50,000 (STCG of ₹50,000).
- Stock B: Bought for ₹1,00,000, sold for ₹70,000 (STCL of ₹30,000).
By offsetting the ₹30,000 loss from Stock B against the ₹50,000 gain from Stock A, your net taxable gain becomes ₹20,000. This reduces your tax liability significantly. This is ideal for 5+ year investors balancing growth and tax efficiency. It also suits investors with taxable portfolios, especially HNIs or active traders facing high capital gains.
When to Implement:
The optimal time to engage in tax loss harvesting is before the end of the financial year, which in India runs from April 1st to March 31st. This timing allows you to assess your portfolio and make necessary adjustments to minimize tax liabilities. Additionally, it’s beneficial to review your portfolio before the due date for the payment of the fourth installment of advance tax, which is on or before March 15th.
Conclusion:
Tax loss harvesting in India is a savvy way to cut taxes and optimize portfolios, but requires careful execution. By understanding the rules and timing your actions appropriately, you can make the most of this approach. By understanding the rules and timing your actions appropriately, you can make the most of this approach. Ready to save on taxes? Explore more investment insights now!
– Ketaki Dandekar (Team Arthology)
Read more about Tax Loss Harvesting here – https://cleartax.in/tax-loss