Tax harvesting is one of the most effective ways to reduce the tax liability in equity investing. Investors can book tax-free long-term capital gains of up to Rs 1.25 lakh towards the end of the financial year. And those who have incurred losses, should book them as well.
Investors with a large portfolio of stock and equity mutual funds will have higher incremental gains. They must harvest the gains to ensure that they do not build up beyond the tax-free limit and need to pay higher tax when selling the stocks or redeeming the mutual fund units.
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A listed equity share if held for a period of more than 12 months is classified as a long-term capital asset. While any gain on such long term capital gain is taxed at 12.5%, there is a basic exemption limit of Rs 1.25 lakh per year available to individual investors till which capital gain tax does not apply.
For example, you invested Rs 10 lakh in December 2023 and now the investment value is Rs 12 lakh. Now you can sell and book gains of up to Rs 1.25 lakh and the long-term capital gains become nil. Doing this every year will reduce the tax liability significantly if all the gains are sold, say once after five years.
Sandeep Sehgal, partner, Tax, AKM Global, a tax and consulting firm, says tax harvesting helps investors to minimise their tax liability and lower their taxable income. “Harvesting gains incrementally helps to stay within the tax-exempt threshold and prevents a significant tax burden in the future when selling large investments, if any,” he says.
Harvest capital loss
Harvesting capital loss is just the reverse of harvesting gains. Long-term capital losses can be set-off against any other long-term capital gains. In case of loss from equity investing, investors can book losses and then set-off short-term capital losses against short-term or long-term capital gains from any other investments to bring down their tax liability.
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Short-term capital gains for listed stocks and equity-oriented mutual funds (if held for less than 12 months) are taxed at 20% irrespective of the amount of gain.
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