The question is how to save on income tax after earning either Long Term Capital Gains (LTCG) or Short Term Capital Gains (STCG) from your mutual fund investments. The simple answer is Tax Harvesting. Tax harvesting is a strategy that can help your profits on investments to not fall under the purview of income tax liability. Let’s find out what tax harvesting is and how it works.
What Is Tax Harvesting?
Tax harvesting is a strategic approach that you can use to minimise LTCG tax on your investments. Long capital term gains are the profits you get when you sell your assets like mutual funds, stock investments, properties and other assets you have held for over 12 months.
Tax harvesting involves selling a part of the investment in mutual funds or stocks, realising the gains, and then reinvesting the proceeds into a similar investment. You can save taxes either by harvesting gains or losses.
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How Does Tax Loss Harvesting Work?
Tax loss harvesting involves selling investments that are currently at a loss to offset gains made from other investments. This will reduce your total income tax liability. If the loss exceeds the gains that you earned the same year, the leftover amount can be carried forward to offset gains in future years. This strategy saves you from paying higher income tax as it reduces the taxable capital gains.
Suppose you have long-term capital gains exceeding ₹1 lakh. You could identify underperforming investments in your portfolio and sell them to book losses and offset gains from other profitable investments up to the ₹1 lakh exemption limit. You can then immediately reinvest the proceeds into the some other asset. By reinvesting the redeemed amount, you can maintain your portfolio’s growth potential.
How Much Does Tax-Loss Harvesting Help In Saving Income Tax?
In 2018, the then Finance Minister Arun Jaitley re-introduced LTCG on equities. Currently, 10% tax is applied to any long-term gain from investments that exceed ₹1 lakh within a financial year. Here an example to show tax harvesting works.
Suppose you invested ₹1 lakh in an Equity Mutual Fund on June 19, 2014. By June 19, 2024, the value of your investment will grow to an amount of ₹3.1 lakh (assuming the return rate p.a. is 12%). If you sell now, you earn a gain of ₹2.1 lakh, which is above the ₹1 lakh annual tax exemption limit for LTCG tax, meaning you have to pay taxes. In this case, you have to pay ₹11,000 [10% on (₹2.1 lakh – ₹1 lakh) LTCG].
But if you reinvest the ₹1.1 lakh, which is the gains above the tax threshold, you don’t have to pay any taxes on your LTCG.
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How To Do Tax Harvesting On Kuvera?
Follow these steps to start harvesting on Kuvera:
1/ Activate Tax Harvesting Feature
You can sign up or log in to your Kuvera account. Then go to the tax harvesting feature which is currently available for free for a limited time period only. Now, you can activate the feature to start tax harvesting.
2/ Receive Timely Recommendations
Once activated, Kuvera monitors your portfolio and provides timely recommendations on when to execute tax harvesting transactions. These recommendations are based on your portfolio performance and current market conditions to optimise tax savings according to your financial goals.
3/ Initiate The Transaction
You can follow the transaction recommendation provided by Kuvera. To minimise the impact on Net Asset Value (NAV), it’s advised to sell and buy back the same mutual fund units on the same day.
4/ Realise Gains within Exempt Limit
The goal is to realise gains up to ₹1 Lakh every financial year, as gains within this limit are exempt from LTCG tax. This process allows you to harvest your gains incrementally rather than accumulating significant taxable gains over years.
5/ Check Tax Harvesting History
Kuvera automatically calculates the tax harvested on any sell transaction. You can view the history of tax harvested each financial year to keep track of your tax-saving progress.
6/ Enjoy Tax Benefits
By applying this technique, you can maximise your in-hand gains. For example, without tax harvesting, gains of ₹3L over three years would result in a taxable gain of ₹2L (exceeding the ₹1L exemption), leading to a tax of ₹20,000. With tax harvesting, you can avoid the tax altogether and maximize your in-hand gains.
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Can I Sell And Buy On The Same Day For Tax Harvesting?
In India, there are no regulations that prohibit tax loss harvesting, including selling and buying the same stock on the same day (also known as the Wash Sale Rule).
Can Tax-Loss Harvesting Be Carried Forward?
Tax-loss harvesting can be carried forward for up to eight financial years from the year they were incurred.
How Does Tax Harvesting Affect My Investment Strategy?
Tax harvesting can significantly impact your investment strategy. By selling securities at a loss or under-performing securities, you can offset capital gain taxes owed on other investments. This allows you to reinvest the savings back into your portfolio. It can help you lower your overall tax liability and increase your long-term portfolio returns.
Can Tax-Loss Harvesting Work In A Bear Market?
Tax-loss harvesting can be an effective strategy during a bear market. When prices of securities decline, investors can sell losing positions to realise capital losses, which can then be used to offset capital gains and reduce their total tax liability.
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Watch here: Tax Harvesting Your Long-Term Capital Gains
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