How to harvest tax-free capital gains from stocks and equity oriented mutual funds?

livemint.com:

₹1 lakh tax-free gains from stocks and equity oriented mutual funds. With the BSE Sensex rising 26% and the midcap and smallcap indices shooting up more than 60% in the past one year, most stock investors saw their portfolio grow during the financial year. Long-term capital gains from stocks and equity oriented mutual funds are now taxed at 10%.

However, under section 112A, long-term capital gains of up to ₹1 lakh from equity and equity oriented mutual funds are tax free in a financial year. If you are sitting on handsome profits, it may be a good idea to optimise your tax by harvesting some of the gains. This is true even for long-term investors.

Instead of accumulating long-term capital gains for several years and booking profits at one go, they can reduce their tax liability by booking profits of up to ₹1 lakh every year. Here’s how it works. Suppose you are holding 500 shares of NTPC bought more than one year ago at ₹150.

The current price is ₹330, which means your investments have grown by ₹80,000. If you sell these 500 shares before 31 March, you will book a profit of ₹80,000 for the financial year 2023-24. This is tax free money.

After these stocks have gone out of your demat account, you can buy them back again. Assuming you buy 500 shares back at ₹335, your cost of acquisition will now get reset at a higher level for tax purposes. What happens if you don’t sell now and continue to hold them for the long term.

Let us assume NTPC stock price goes up and you sell the shares at a higher price of ₹500. In that case, the ₹1.75 lakh long-term gains you will get will not be completely tax free. Only ₹1 lakh will be tax free while the remaining ₹75,000 will be subject to 10% tax.