Tax harvesting entails two strategies tax loss harvesting and tax positive factors harvesting. Traders are liable to pay capital positive factors tax on equities solely when the shares are offered. Whereas taxes are payable on positive factors, buyers even have a chance to avoid wasting taxes in the event that they incur losses.
What’s tax loss harvesting?
Tax loss harvesting entails promoting equities which might be at a loss after which carrying ahead the loss to offset positive factors in future years. The loss could be carried ahead for as much as eight evaluation years from the evaluation 12 months by which it was incurred.
Instance: An investor named John offered shares of X Firm on Friday (purchased in February final 12 months) and made a revenue of Rs 5 lakh. Because the holding interval is greater than 12 months, that is handled as a long-term capital achieve (LTCG).
Breaking down his tax legal responsibility: Rs 1.25 lakh of the revenue is exempt, whereas the remaining Rs 3.75 lakh is taxed at a flat charge of 12.5%. John desires to scale back his tax legal responsibility utilizing tax loss harvesting.
John additionally owns shares of Y Firm, which have fallen considerably beneath his buy worth. By promoting Y shares and incurring losses of Rs 3.75 lakh, his total tax legal responsibility for the 12 months is lowered to zero, because the losses offset the positive factors from X shares.
“This technique known as tax loss harvesting. Regular human tendency is to promote shares which might be worthwhile and maintain shares which might be in loss. Tax loss harvesting is about promoting shares incurring substantial loss in order that it might probably offset earnings already made. Except you promote the shares, you can not declare the loss below Revenue Tax legislation,” mentioned tax and funding skilled Balwant Jain.For brief-term capital positive factors (STCG), i.e., revenue from promoting shares held for lower than 12 months, the tax is 20% flat and doesn’t benefit from the Rs 1.25-lakh exemption like LTCG. You’ll be able to guide losses as much as the positive factors made throughout the 12 months to scale back STCG legal responsibility, Jain explains.
What if the inventory you wish to promote for tax loss harvesting is anticipated to rally sooner or later? In John’s instance, if he believes Y shares will rise, he can nonetheless guide a loss and purchase the identical inventory in a special buying and selling account on the identical day. If he has just one demat account, he can repurchase the inventory the subsequent day. Nonetheless, intraday sale and buy on the identical day utilizing the identical account won’t qualify for tax loss harvesting.
What’s tax positive factors harvesting
Take into account an investor named Harry. He holds 100 shares of A Firm for greater than 12 months. As we speak, the overall revenue from promoting all shares can be Rs 3 lakh.
If Harry sells solely 41 shares and continues to carry the remainder, his LTCG reduces to Rs 1.23 lakh, which falls below the exemption restrict, leading to zero tax legal responsibility. This technique known as tax positive factors harvesting.
Within the July 2024 price range, Finance Minister Nirmala Sitharaman revised STCG and LTCG charges:
STCG: elevated from 15% to twenty% for shares held lower than 12 months.
LTCG: elevated to 12.5% on positive factors exceeding Rs 1.25 lakh for shares held 12 months or extra.(Disclaimer: Suggestions, recommendations, views, and opinions given by the consultants are their very own. These don’t signify the views of The Financial Occasions.)
