TAX LOSS HARVESTING

Selling off equity investments at a loss in order to offset capital gains from other equity investments and lower the tax burden is known as tax-loss harvesting.

Find the Equity Investment Losing Money: Find out stocks and mutual funds that aren't making money right now. To lower your total taxable income from capital gains, these losses can be offset against profits.

Sell the Losing Investments: Sell the identified losing investments before the end of the financial year to realize the losses. These losses will be considered realized losses and can be offset against capital gains.

Offset Gains with Losses: STCL (short-term capital loss) can be used to offset both STCG and LTCG.

Set off Long-Term Losses: LTCL (long-term capital loss) can only be used to offset LTCG.

Carry Forward Losses: Unutilized losses can be carried forward for 8 assessment years and offset against future capital gains, provided they are declared in your income tax return.

Reinvest the Funds (Optional): Depending on your plan, you can reinvest in the same or different stocks after realizing the loss. Though India doesn't have a strict wash-sale law like the US, you should nevertheless exercise caution when it comes to the "wash-sale" rule, which prohibits selling an asset at a loss and then buying it again right away.

Maintain Records:

When filing income tax return, you'll need to have documentation of every transaction, including the buying and selling of the investments. So, keep track of everything. In your income tax returns (ITR-2 for individuals with capital gains), be sure to include information about both capital gains and losses.

Seek Professional Advice: Harvesting tax losses can be complicated. To make sure that your plan is optimized and that tax regulations are followed, it is advisable to speak with a financial counselor.

                    

Short-term capital losses can be offset against short-term capital gains: For example, if you have a ₹1 lakh short-term capital loss and a ₹1.5 lakh short-term capital gain, you can offset the losses against the gains and only pay taxes on the net gain of ₹50,000 .

Long-term capital losses can be used to offset long-term capital gains: For instance, if you incur a ₹2 lakh long-term capital loss and have a ₹3 lakh long-term capital gain, you can offset the gains by the losses, resulting in a net taxable gain of ₹1 lakh.

If you have both short-term and long-term capital losses and gains, you can offset short-term losses against short-term gains and long-term losses against long-term gains.

Long-term capital losses can be offset for up to eight years against long-term capital gains:

If you have unused capital losses from previous years, tax loss harvesting can be employed to offset gains and fully utilise any carried-forward losses.

Tax-loss harvesting can be a useful strategy to manage tax liabilities, but it requires careful planning and attention to market conditions.

Regards, 

Col Sanjay Datt

Associate Business Partner, 

Investor First

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