Heard of tax loss harvesting? If not, here’s how you can save on your tax bill for the year.
What is tax loss harvesting?
For this financial year, you would ideally end up paying taxes on all your investing gains - short term gains, long term gains, whatever.
But you can reduce the taxable amount on gains by simply selling all your loss-making investments before March 31.
Say you started with a portfolio of 10 stocks - Rs. 1 lakh in each stock - totalling to Rs. 10 lakh.
Over the year, some of your stocks did really well, and you booked profits. For simplicity, let's say 2 of your stocks doubled in value, and you booked Rs. 2 lakh in profit.
Now your taxable gains stand at Rs. 2 lakh. This is what you will pay capital gains tax on.
But, here’s what you can do to reduce the amount of tax you pay.
Check your portfolio for some loss-making stocks. In a portfolio, some stocks do well, some don’t.
Say 2 of your stocks have halved in value. That’s a notional loss of Rs. 1 lakh. You haven’t sold these stocks, and you’re holding on to them.
What you can simply do is - sell those 2 loss-making stocks before March 31, and reduce your taxable gains from Rs. 2 lakh to Rs. 1 lakh.
If you have invested in these stocks for the long run, and believe they will increase in value and you will make money, you can just buy them back on April 1.
You can even buy more quantity of those stocks if your conviction is high, averaging your cost down.
If you think you had made a mistake by investing in those stocks, you can just use the opportunity to invest somewhere else instead on April 1.
How much will I save?
On our earlier example, say you had booked profits within 12 months of buying those 2 stocks that doubled in value. You would pay a short term capital gains tax @15% on the Rs. 2 lakh. That’s a tax of Rs. 30,000.
Now, if you sold your loss-making investments and booked a loss of Rs. 1 lakh, your taxable income from capital gains will come down to Rs. 1 lakh. At the same tax rate, you will end up paying a tax of Rs. 15,000.
That’s a saving of Rs. 15,000!
This is lit. Where do I start?
Just go to your broking app, download your statement and see what your profits this year have been on the investments you sold.
Then go to your portfolio and see if anything is making a loss.
Sell all those loss making investments till you have minimised your gains - before March 31.
Buy those sold shares back or buy new ones on April 1.
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