Now that there is less than a week before the financial year FY22 ends, Zerodha co-founder and CEO Nithin Kamath has advised investors to consider reducing tax for better returns in the long run.
Taking to Twitter, Kamath said, "Successful investing is about doing boring things well. One of them is tax-loss harvesting. Booking a loss can be painful because we are all loss averse, & we instinctively try to avoid losses. But reducing taxes can add up in the long run & lead to better portfolio returns."
He advised investors to make the most of tax-loss harvesting to reduce tax liability on investments.
"If you have realized capital gains on which you have to pay taxes, you can reduce your tax outgo by selling any holdings which are in losses before March 31st. This is also called Tax-Loss Harvesting," Kamath retweeted Zerodha.
Click here to better understand what is tax-loss harvesting
In a series of tweets, Kamath asked his investors in pointers,
1) Check if they have realized short-term capital gains on which they are required to pay 15 percent tax. If yes,
2) If yes, check if you have any holdings with unrealized short-term loss.
3) If yes, sell the holdings (<365 days), book the loss & reduce your STCG & hence taxes.
Kamath further added that 'this is also a nice way to get rid of duds in your portfolio'.
Zerodha has also created a report to help investors spot tax-loss harvesting opportunities in your account. Link Here
"So, if you have realized long-term capital gains (LTCG) or short-term capital gains (STCG) on which you have to pay taxes this financial year, we will show you the amount of unrealized short-term capital losses (STCL) and long term capital losses (LTCL) you can book to reduce the tax outgo," it said.
In an example, it explained, "suppose an account has ₹1,37,000 as STCG on which a 15 percent tax of ₹20,550 is due to be paid; and LTCG of ₹8,10,000 on which 10 percent above ₹1 lakh of ₹71,000 is due. This investor can sell any of the stocks from the list in this report, book the loss, reduce the LTCG/STCG, and save over ₹91,550 in taxes. The investor would have to make this transaction before March 31, 2022, to harvest losses for FY21/22."
If investors intend to hold these stocks and don’t want to sell them, you can buy the stock back after two days of selling, it added. Two days because that is the settlement cycle when one buys or sells stocks—it takes 2 days for the stock to be debited from one's demat. Investors can also potentially sell their stock holdings and buy similar stocks in the same sector immediately.