Late Finance Minister Arun Jaitley reintroduced the taxation of long-term capital gains on stocks in 2018. Long-term capital gains are the profits you receive when you sell stock assets that you've held for more than a year.
Any long-term gain from stock investments that exceeds Rs. 1 lakh in a fiscal year is now subject to a 10% tax. On the other hand, the seller must pay a short-term capital gains tax of 15% if the shares or mutual fund units are sold within a year after acquisition and they generate any profit.
Therefore, you must take steps to guarantee that these profits don't accumulate over the tax-free threshold if you wish to pay little or no taxes and that's how tax loss harvesting comes into the picture.
Tax loss harvesting
A tax loss harvesting method can help you transform financial losses into gains by converting a part of your investment losses into tax offsets. Selling certain shares at a loss helps you make up for profits made by selling other equities at a profit. As a result, your tax burden is reduced since you only pay taxes on your net profit, which is the sum of your gains minus your losses.
Investors can buy comparable investments that might rise over time and help them recoup their losses using the revenues from selling their failing assets. A beneficial cycle of tax savings can then be maintained by offsetting these future profits with subsequent future losses.
Working of tax loss harvesting
By tracking losses and offsetting profits in any other instrument, tax-loss harvesting allows you to reduce your tax obligation. Removing underperforming funds from the portfolio and staying in solid funds that may have seen a short-term hiccup is a good approach to employ tax-loss harvesting.
Assume, for instance, that your short-term capital gains for the year equal Rs. 10 Lac. You must pay taxes on this at a rate of 15%, which works out to Rs. 150,000. (STCG).
Assume that you currently own shares of stock with a Rs. 6,000,00 unrealized loss. To bring your net STCG down to ₹4,000,00, you can sell these stocks. Therefore, you would pay 60,000 rupees in taxes (15 percent of Rs. 4,00,000), saving you Rs. 90,000.
According to experts, tax harvesting is one of the best strategies for reducing the tax burden associated with equities investing. However, they advise that in order to take advantage of compounding, the money earned and redeemed must be invested right away.