Tax Loss Harvesting – How it works everything you should know

Tax-loss harvesting

Tax loss harvesting or tax loss selling is a practice of selling a security that has incurred a loss to help investors reduce or offset taxes on any capital gains income subject to taxation. This practice is accomplished by harvesting the loss.

Selling your stocks or fund units at a loss lowers your capital gains tax liability, which is known as tax-loss harvesting. This technique allows for a smaller tax payment by offsetting equity capital gains against capital losses. In previous years, you could keep your long-term capital gains (LTCG) from the sale of equity funds and shares totally exempt from taxes. The tax treatment of LTCG on the sale of listed equity shares and equity funds has been modified, nevertheless, by the amendment included in the Union Budget 2018.

Is tax loss Harvesting allowed in India

The income tax framework in India does not explicitly disallow tax-loss harvesting. However, you must consult your chartered accountant or a tax expert before opting for this tax-saving tool.

The sale and repurchase of stocks, solely with the motive of tax evasion by showing a loss, might invite scrutiny of the Income Tax Department.

Read Also: Not filing ITR, Delhi court sentences woman to 6 months jail

How it work in India

In India, tax loss harvesting is particularly applicable to shape of capital profit taxation.

In Indian there are two types of capital profits one is short term  and other one is long term, every with distinctive tax fees. Short-time period capital gains (STCG) on equities are taxed at 15%, at the same time as long-time period capital gains (LTCG) over INR 1 lakh are taxed at 10% without indexation.

How the tax loss harvesting works

Another name for tax-loss harvesting is tax-loss selling. Most traders utilize this technique at the end of the year, following an analysis of their portfolios’ annual performance and its impact on their taxes. If an investment shows signs of depreciation, it might be sold to claim a credit toward the profits discovered in other properties.

One method of lowering basic taxes is through tax-loss harvesting. Security B’s capital gains tax liability can be eliminated by selling a loss within the value of Security A, which will balance the price increase of Security B. By employing the tax-loss harvesting strategy, investors can realize significant tax benefits.

Key factor to note to set off losses against STCG and LTCG

It is significant to remember that only long-term capital gains may be offset by long-term capital losses. In the same manner, a short-term capital loss can be set off against both long-term capital gains and short-term capital gain. Long-term capital losses cannot be offset by a short-term capital gain.

Although you can reduce your tax liability and keep your portfolio balanced by using tax-loss harvesting, selling securities at a loss should be consistent with your investing strategy and level of risk tolerance.

Read Also: ITR-U: Last date to File ITR for FY 2019-20, 2020-21 and 2021-22

Advantages of tax loss harvesting

  1. Reduces tax liability: By offsetting gains with losses, tax-loss harvesting can help reduce the overall tax liability of an investor.
  2. Improves after-tax returns: Since taxes can eat into investment returns, tax-loss harvesting can improve an investor’s after-tax returns by reducing the amount of taxes owed.
  3. Helps maintain portfolio diversification: Instead of simply selling losing investments, tax-loss harvesting allows investors to sell underperforming investments while maintaining the overall asset allocation and diversification of their portfolio.
  4. Provides an opportunity to reinvest: By selling losing investments and reinvesting the proceeds, investors have the potential to recover losses and generate future gains.
  5. Can be done annually: Tax-loss harvesting is an ongoing process that can be done every year, providing investors with a continuous opportunity to improve their after-tax returns.
  6. Reduces overall investment risk: By selling underperforming investments and investing in more promising ones, tax-loss harvesting can help reduce the overall investment risk in a portfolio.
Read also:- March 31 is last date to file ITR-U for AY 2021-22; 200% of tax evaded, if you miss
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