Tax Loss Harvesting: According to experts, tax harvesting is one of the most effective ways to reduce tax liability. Let us know what it is and how you can take advantage of it.
Tax Loss Harvesting Calculation: Whenever investors sell their investments in stocks or mutual funds, they incur a capital gain or loss. Capital gains are taxed on the basis of the holding period of your investment. Experts say that if an investor has made capital gains on which he is liable to be taxed, then he can reduce his tax liability by using the tax-loss harvesting method. This means that you can reduce your tax liability to some extent through the tax loss harvesting method. According to experts, tax harvesting is one of the most effective ways to reduce tax liability. Let us know what it is and how you can take advantage of it.
What is Tax-Loss Harvesting Method
Vikas Singhania, CEO, online trading platform TradeSmart, told FE Online, “Tax-loss harvesting is a way through which an investor can reduce the tax on his trading gains. Suppose a trader has done many trades during a year and he has made a lot of profit in it. So, at the end of the year, the trader will have to pay long term or short term tax on his profits.” Tax loss harvesting method is mostly used to reduce the payment of short term capital gains tax. Singhania further said, “Suppose a trader is incurring losses on some stocks. He can sell those shares at a loss and adjust them against the profits booked on other shares. Doing this will reduce your tax liability on capital gains.
Archit Gupta, Founder and CEO, Tax and Financial Services software platform Clear (formerly ClearTax) said, “Tax-loss harvesting requires you to sell your stock/fund units at a loss to reduce your tax liability on capital gains. ” With effect from April 1, 2018, Long Term Capital Gains (LTCG) above Rs 1 lakh are taxed at the rate of 10% without indexation. In comparison, short term capital gains (STCG) are taxed at the rate of 15%.
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How Tax Loss Harvesting Works
You can understand this with an example. Suppose an investor has made a short term capital gain of Rs 1 lakh this year, then he will have to pay tax of Rs 15,000. If that investor holds the stocks with a loss of Rs 60,000 and sells them, the short term capital gain will come up to Rs 40,000. As a result, the investor will have to pay tax of only Rs 6,000, which is 15 per cent of Rs 40,000. This method will help the investor to reduce losses and save tax of Rs 9,000.
Benefits of Tax Loss Harvesting
According to Gupta, the proceeds from the sale of loss making stock/equity fund can be used to buy attractive stock/equity fund. This is necessary to maintain the original asset allocation of the portfolio. He further added, “Moreover, it maintains the risk-return profile of the portfolio. Tax-loss harvesting is an important tool to save tax. Apart from this, you get to know about the ways to diversify your portfolio to get high returns. It does not reduce the loss, but definitely helps you save tax.”
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Tax Harvesting: Keep These Things In Mind
Experts say that income tax rules should be followed while using the tax loss harvesting method. When making a loss using tax-loss harvesting, you need to keep a few things in mind. Long term capital loss can be set-off only against long term capital gain. You cannot set-off long term capital loss with short term capital gain. Short term capital loss can be set-off against short term capital gain or long term capital gain.
(Article: Rajeev Kumar)
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