To harvest one thing means to choose or gather it. You may do the identical in investing: Tax-loss harvesting is the promoting of inventory/mutual funds at a loss to offset a capital good points tax legal responsibility, and usually such investments are purchased again to keep up the identical asset allocation/portfolio.
When one earns earnings on sale of capital property, it’s taxed as long-term capital good points (LTCG) or short-term capital good points (STCG) primarily based on the holding interval. The tax on such earnings may be reduce all the way down to some extent utilizing a complicated tax planning mechanism often known as tax-loss harvesting.
Say, you invested ₹6 lakh in listed shares and ₹3 lakh in equity-oriented mutual funds in April 2018. The worth of the shares is ₹4.5 lakh in April 2020 and the worth of the mutual funds is ₹5 lakh. You wish to liquidate the mutual funds. The LTCG on redemption of MF is ₹2 lakh (sale worth of ₹5 lakh – value of ₹3 lakh). Of this, ₹1 lakh is exempt and also you pay 10% plus cess of 4% as LTCG tax i.e. ₹10,400.
Prior to 31 March 2018, there was no tax on LTCG on shares and equity-oriented mutual funds; due to this fact, long-term loss on such transactions was thought-about as a useless loss. After 31 March 2018, the situation modified; earnings/good points on long-term shares or equity-oriented mutual funds are actually taxable in extra of ₹1 lakh.
Every coin has two sides. The constructive facet to this tax provision is that if in case you have incurred a long-term capital loss on sale of shares or equity-oriented mutual fund models, then you possibly can set them off in opposition to any LTCG.
So, within the above instance, although you wish to maintain holding the shares for the long run, for the aim of tax planning you promote the shares and reinvest the sale proceeds in the identical shares throughout the subsequent two to 3 days. This sale and reinvestment is a authorized transaction and doesn’t have an effect on your funding quantity or returns generated. The ₹1.5 lakh long-term capital loss (LTCL) on sale of shares may be set off in opposition to the LTCG of ₹2 lakh on redemption of the MF and the stability LTCG of ₹50,000 being much less that ₹1 lakh is exempted. Thus, you pay no tax.
Also, in case losses from the sale of capital property exceed the good points from such property after setting off losses and good points of a selected yr, you possibly can carry ahead such losses for setting off in later years as much as eight evaluation years. However, take into account that losses for a yr can’t be carried ahead except that yr’s return has been filed earlier than the due date.
It is pertinent to notice that LTCG may be set off in opposition to LTCL and short-term capital loss (STCL), whereas STCG may be set off solely in opposition to STCL. There isn’t any asset class restriction on the set off. Hence, losses in equities may be set off in opposition to good points in debt, actual property or gold.
Case examine: Let us contemplate the case of Rakesh, for example. During the yr, Rakesh offered a plot of land he had bought for ₹1 lakh in April 2001 for a value of ₹5 lakh. The value of acquisition after indexation profit is ₹3.17 lakh. The LTCG on this sale after advantage of indexation is ₹1.83 lakh. What motion can Rakesh take to scale back his tax legal responsibility on this case? Also, eight months in the past, he had bought 1,500 listed shares in Company A at ₹200 per share. The share is now buying and selling at ₹20 every. Is any motion required for these shares?
Since Rakesh has offered the land he has held for greater than 24 months, the sale is liable to LTCG tax. The tax on LTCG of ₹1.83 lakh shall be ₹38,064 (20% LTCG tax plus 4% cess).
Suppose Rakesh doesn’t wish to purchase a home or make investments this quantity in capital good points bonds of the federal government, he can save tax by promoting off the 1,017 shares of Company A and reserving lack of ₹183,060 (sale worth of ₹20,340 – value of ₹203,400), which may be set off in opposition to LTCG of ₹1.83 lakh. Thus, the tax legal responsibility shall be nil. Rakesh can carry ahead STCL of ₹60 and set it off in opposition to capital good points within the subsequent eight years.
Also, if Rakesh needs to proceed his holdings in Company A, he should reinvest the sale proceeds of ₹20,340 in Company A’s shares throughout the subsequent two to 3 days. Thus, he’ll proceed his funding holdings and in addition save on tax.
Nitesh Buddahdev is the founding father of Nimit Consultancy.
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