What is Tax Harvesting and Tax-Loss Harvesting ?

 

Tax harvesting is a technique of reducing long term capital gains on your equity investments and mutual fund investments.

This can be achieved by selling a part of your investment units to book a long term capital gain (LTCG) and reinvesting the amount back into the same instrument.

Let us understand this technique with an example, assume you have invested 5,00,000 in an equity mutual fund on 15^th May 2020, considering a substantial growth in your investment, the invested amount in now 5,90,000 as of June 20^th 2021, Now if you redeem the gains, your tax liability is Zero as Long term capital gains up to 1 lakh are exempt. And reinvest the amount 5,90,000 again and start as initial capital as 5,90,000 and upcoming year on July 13^th 2022 the investment amount becomes 6,50,000, still the tax liability is zero as (6,50,000 – 5,90,000 = 60,000) exempt is 1 lakh on LTCG.

Now consider you do not redeem the LTCG n the first year and keep it invested, after 2 years your gains are 6,50,000 – 5,00,000 = 1,50,000, 1 lakh is exempted and 10% of 50,000 is 5000, so you are liable to pay a tax of Rs. 5000.

Tax Loss harvesting

This is a method where you book losses to offset the gains in other instruments to bring down your tax liability.

This is the most commonly used technique while filing tax returns which can be achieved by selling an underperforming stock of mutual funds in your portfolio.

Assume you have made 1,00,000 short term capital gains this year, according to law, you are liable to pay 15% tax on STCG on the 1,00,000 earned i,e 15,000 rupees, Also if you hold a loss-making stock of 60,000 in your portfolio you can sell it and book the loss, so your STCG becomes 40,000, and tax liability is only 6,000. This is how Tax-loss harvesting works.

Note: Tax on Short and long term capital gains are irrespective of your tax slabs and there is provision to carry forward short and long term loss up to 8 assessment years.