Tax harvesting involves strategically selling investments at a loss to offset capital gains and reduce tax liability. By realising losses, investors can decrease their taxable income, potentially saving money on taxes. This technique is commonly used to optimise investment portfolios.
Tax harvesting is a strategy used by investors to maximise tax benefits, particularly concerning long-term capital gains (LTCG). Before 2018, there was no tax imposed on LTCG. However, when the government introduced this tax, they provided a small benefit: capital gains up to ₹1 lakh are tax-free in case of equities.
However, many investors find it challenging to fully utilise this ₹1 lakh exemption. In India, taxes are levied on realised profits, meaning the gains must be actualized through the sale of assets. This poses a dilemma for investors whose portfolios have accrued significant profits but haven't yet sold their assets to realise these gains.
Also Read:How to harvest tax-free capital gains from stocks and equity oriented mutual funds?
Here's where tax harvesting comes into play:
Let's consider an example: Shubham has been holding onto his stocks for three years, and his long-term capital gain amounts to ₹3 lakhs. Deducting the ₹1 lakh exemption, he is left with ₹2 lakhs, on which he would have to pay a 10% tax, amounting to ₹20,000.
On the other hand, suppose another investor, let's call him Varun, adopts the tax harvesting strategy. Varun sells a portion of his profit-making shares every year, realising his LTCG annually. By doing so, Varun effectively resets the cost basis of his investments each year, ensuring that his gains remain within the ₹1 lakh exemption limit. Therefore, even after three years, when Varun’s total LTCG
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