Introduction:
When engaging in financial investments, it’s essential to recognize that there is inherent risk involved, and not all investments will yield profits.
Tax loss harvesting involves offsetting capital gains tax resulting from the sale of capital assets at a profit. Taxpayers have the opportunity to sell another capital asset at a loss, allowing them to offset the losses from that sale and potentially reduce or mitigate the tax liability arising from the capital gain.
How Tax Loss Harvesting works:
In tax loss harvesting, many investors adhere to a strategy wherein they identify assets that are experiencing losses and those generating profits, offsetting them against each other. This strategy typically commences with selling an asset or fund that exhibits consistent decline and has substantially depreciated in value, with little prospect of immediate recovery. In such instances, individuals can sell the depreciated asset and utilize the resulting loss to offset gains from the sale of another asset. Alternatively, the loss amount can be employed to acquire another asset, stock, or fund. While tax loss harvesting may not entirely eliminate losses, it can substantially mitigate them, resulting in significant savings.
Capital gain taxation in India
In India Capital gain can be classified into two types long and short.
- Short term- In case of listed securities held for less than 12 months it is reported short term and taxed at a rate of 15%
- Long term- In case of listed equity shares held for more than 12 months it is reported as long term and taxed at a rate of 10% with an exemption upto Rs. 1,00,000.
This structure helps the investors to offset their short-term loss with long term gains.
Points to be kept in mind
Offsetting Capital Losses: Tax loss harvesting allows you to offset your capital losses against capital gains, either short-term or long-term. This can help reduce your overall tax liability for the year. For example, if you have incurred short-term capital losses, you can offset them against short-term or long-term capital gains.
Limitation on Offset: While short-term capital losses can be used to offset both short-term and long-term capital gains, long-term capital losses can only be used to offset long-term capital gains. This limitation should be taken into account when planning tax loss harvesting strategies.
Caution in Decision Making: While tax loss harvesting can be a valuable strategy for minimizing taxes, it’s essential not to base your investment decisions solely on this strategy. Consider the long-term prospects of your investments and their alignment with your overall investment strategy. If you believe that an investment has the potential to generate significant returns over time and aligns with your investment goals, it may be prudent to continue holding it despite short-term losses.
Conclusion: In essence, while tax loss harvesting can be advantageous for reducing tax liabilities, it’s important to integrate it into a comprehensive investment plan that prioritizes long-term financial goals and investment strategies.
Author
Fareed
