The Union Budget 2024 introduced significant changes to the taxation of capital gains from equity investments:

• Short-Term Capital Gains (STCG): Profits from selling listed equity shares, equity-oriented mutual funds, and units of business trusts within one year are now taxed at 20%, increased from the previous 15%.

• Long-Term Capital Gains (LTCG): Gains from selling these assets after one year are taxed at 12.5% without indexation benefits. Additionally, the exemption limit for LTCG has been increased from ₹1 lakh to ₹1.25 lakh.

Given these updates, employing strategies like Tax Loss Harvesting can effectively reduce your tax liability.

What is Tax Loss Harvesting?

Tax Loss Harvesting involves selling underperforming assets at a loss to offset gains from profitable investments, thereby lowering your taxable income.

Example of Tax Loss Harvesting

Consider the following scenarios:

Scenario 1: Adjusting Short-Term Gains with Losses

By offsetting the ₹25,000 loss against the ₹60,000 gain, the taxable short-term gain reduces to ₹35,000, resulting in a tax liability of ₹7,000.

Scenario 2: Not Adjusting Short-Term Gains with Losses

In this case, since the ₹25,000 loss is not adjusted, the full ₹60,000 gain is taxable, leading to a tax liability of ₹12,000.

Note: If losses exceed gains, the remaining loss amount can be carried forward and adjusted against future capital gains for up to 8 years

Benefits of Tax Loss Harvesting

• Lower Tax Payments: Offsetting losses against gains reduces your taxable income, thereby decreasing your tax liability.

• Carry Forward Losses: Unutilized losses can be carried forward for up to 8 years to offset future gains.

• Flexible Offsetting: Short-term capital losses can offset both short-term and long-term gains, while long-term capital losses can only offset long-term gains.

• Portfolio Optimization: Selling underperforming assets allows for strategic rebalancing of your investment portfolio.

Key Considerations for Tax Loss Harvesting

• Timing: Ensure that losses are realized within the same financial year as the gains to effectively offset them.

• Wash Sale Rule: Avoid repurchasing the same or substantially identical assets within 30 days before or after the sale to prevent disallowance of the loss for tax purposes.

• Documentation: Maintain accurate records of all transactions to substantiate claims during tax filing.

• Tax Filing: File your Income Tax Return (ITR) on time to claim the set-off and carry forward of losses.

Final Thoughts

Tax Loss Harvesting is a valuable strategy to manage and reduce your capital gains tax liability. By understanding and applying this approach, you can enhance your after-tax returns and maintain a more efficient investment portfolio.

Disclaimer: This article is for educational purposes only and does not constitute financial or tax advice. Consult with a tax professional for personalized guidance.