Tax harvesting..?
Tax harvesting, also known as tax-loss harvesting, is a strategy used by investors to minimize their tax liability by selling assets that have experienced a loss in value. In India, tax harvesting is commonly used at the end of the financial year, which runs from April 1st to March 31st.
Identify Loss-Making Investments:
The first step in tax harvesting is to identify the investments that have declined in value. This could include stocks, mutual funds, or other assets. The goal is to sell these investments at a loss to offset gains from other investments, thereby reducing the overall tax liability.
To identify loss-making investments, investors should review their investment portfolio and look for any assets that have decreased in value since they were purchased. This can be done by comparing the current market value of the investment to its purchase price.
Sell the Loss-Making Investments:
Once the loss-making investments have been identified, they are sold to realize the losses. It is important to ensure that the sale is executed before the end of the financial year to take advantage of the tax benefits.
When selling the loss-making investments, investors should be careful to avoid violating any tax laws or regulations. For example, if they sell an investment within a short period of time after purchasing it, they may be subject to short-term capital gains tax instead of long-term capital gains tax. This could potentially reduce the tax benefits of the strategy.
Offset Gains with Losses:
The losses from the sale of the loss-making investments can be used to offset gains from other investments. This helps to reduce the overall tax liability.
For example, if an investor has gains of Rs. 1,00,000 from the sale of one investment and losses of Rs. 50,000 from the sale of another investment, they can offset the gains with the losses, resulting in a net gain of Rs. 50,000. This net gain will be subject to tax, but the tax liability will be reduced due to the losses.
Carry Forward Losses:
If the losses exceed the gains, the remaining losses can be carried forward to future years. These losses can be used to offset gains in future years, further reducing the tax liability.
For example, if an investor has losses of Rs. 1,00,000 from the sale of an investment and gains of only Rs. 50,000 from the sale of another investment, the remaining losses of Rs. 50,000 can be carried forward to future years. These losses can be used to offset gains in future years, thereby reducing the tax liability in those years.
Be Aware of the Rules:
It is important to be aware of the tax rules and regulations regarding tax harvesting in India.
Following losses from one source can be adjusted against profit from another source under the same head of income:
(a) Loss from a house property can be set-off against income from any other house property.
(b) Short-term capital loss can be set-off against any capital gain (whether long-term or short-term).
(c) Loss from non-speculative business can be set-off against income from speculative or non-speculative business.
(d) Loss under the head ‘Income from other sources’ (except from business of owning and maintaining race horses) can be set-off against any income other than winnings from lotteries, crossword puzzles, etc.
Investors should also be aware of the tax rates and exemptions applicable to capital gains and losses. For example, long-term capital gains tax on equity investments is currently exempt up to Rs. 1,00,000 per financial year. Therefore, if an investor has gains of Rs. 1,00,000 or less from equity investments, they may not need to pay any tax on those gains.
Loss from Crypto Currency / NFT
Any loss from the transfer of virtual digital asset made on or after 01-04-2022 cannot be set-off against income from the same source or any other source. Even vice-versa is not possible, i.e., any loss under any head cannot be set-off against income from the transfer of virtual digital asset. In other words, these losses are permanent losses which cannot be adjusted against any income.
Consult a Tax Expert:
It is recommended to consult a tax expert or financial advisor before implementing a tax harvesting strategy. They can help investors navigate the tax laws and regulations and ensure that they are maximizing the benefits of tax harvesting. A tax expert can also help investors identify any potential risks or drawbacks of the strategy and suggest alternatives if necessary.
