This method of tax harvesting (tax saving) has become particularly useful amongst Indian investors who wish to lower their tax obligations while simultaneously improving portfolio performance. With the right understanding and application of this method, it is possible for one to lower taxes and also achieve a better return on investments.
Comprehending Tax’s Portion
Tax harvesting is when investors sell underperforming securities to realize losses that may provide tax benefits when set off against other capital gains. Thus the strategy lowers one’s taxable income. When selling the underperforming asset investors will often reinvest in like-investments to keep their intended asset allocation.
Constructing Harvestable Tax Position
Identifying Underperforming Assets: Go through your portfolio and note the assets with unrealized losses.
Sell to Realize Losses: Carry out the sale of the identified negative assets.
Offset Capital Gains: Offset appreciated wealth with taxes that were realized alongside the appreciated holdings.
Strategically Reinvest: Offset losses by reinvesting into similar securities to maintain the investment thesis.
Tax Consequences of Capital Gains in India
Under the Income Tax Act of India, the capital gain tax framework has defined two broad categories based on time duration the asset is held:
Short-Term Capital Gains (STCG): Assets disposed off within 12 months yield gains that are taxed at a flat rate of 15%.
Long – Term Capital Gains (LTCG): Tax-free gains on assets held for more than 1 year are capped at ₹1 lakh per year. Any additional amount above the limit is taxed at 10% without indexation.
Tax obligations can also be minimized by offsetting taxable capital gains with realized losses from other investments.
Carrying Forward Losses
A capital loss in a particular financial year, the law permits you to carry these losses for up to eight years. This saves future tax liabilities upon realizing gains.
Practical Scenario
Let’s take the case of an investor who possesses the following:
Short-Term Capital Gains: ₹1,00,000
Long-Term Capital Gains: ₹1,05,000
Short-Term Capital Losses: ₹50,000
Without Tax Harvesting:
STCG Tax: 15% of Short-Term Capital Gains of ₹1,00,000 = ₹15,000
LTCG Tax: 10% of (₹1,05,000 -1,00,000) = ₹500
Total Taxation: ₹15,500
With Tax Harvesting:
STCG Adjusted: ₹1,00,000 – ₹50,000 = ₹50,000
STCG Tax: 15% of ₹50,000 = ₹7,500
LTCG Tax stays the same at ₹500
Total Tax: ₹8,000
The tax harvesting techniques allows the investor to save a total of ₹7,500 in taxes.
Important Factors
Timing: Ensure tax harvesting transactions are done before the financial year-end (31 March) to claim the benefits for that year’s taxes.
Asset Reinvestment: Be aware of the “wash-sale” rule” upon reinvesting the assets because it disallows claiming loss of a security if a substantially similar one is bought within 30 days. While India does not have an official wash-sale rule, it is best not to buy back the same asset straight away to remain on the safe side.
Record Keeping: Files documenting purchase dates, sale dates, and prices should be kept for identifying gains and losses for every transaction.
Using moneymoksh.com for Tax Harvesting
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Conclusion
Tax harvesting is a powerful tactic for investors seeking to minimize their tax exposure and maximize portfolio performance. With the right understanding of the Indian tax landscape, knowing its inner workings and repercussions enables you to take steps towards objectives that are financially favorable. Resources such as moneymoksh.com can simplify this process even more while providing the necessary support and expert information needed to take advantage of the situation.
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