Tax liability can be significantly reduced by offsetting capital losses against capital gains, lowering your total income and, consequently, your tax liability
Tax loss harvesting is a strategy that lets an investor sell loss-making investments to offset taxable gains from other investments. This helps to reduce overall tax liability. This can be helpful for investors who have got lower than experienced returns from their stocks and mutual fund investments. By strategically selling these underperforming assets, one can set off the losses against gains made from the portfolio. In this way, overall tax liability may be reduced.
This allows you to invest in more profitable assets and prevents you from paying more taxes than you need to.
Tax-loss-harvesting legislation is outlined in Sections 70–71 of the Income-tax Act of 1961. While long-term capital losses can only be deducted from long-term capital gains, short-term capital losses can be deducted from both short-term and long-term capital profits under Section 70, which allows losses to be deducted under the same head of income.
“Section 71 further explains that capital losses cannot be deducted from other types of income. Evidently, tax loss harvesting allows investors to convert market dips into tax-saving opportunities, ensuring that their money works smarter, not harder. Additionally, it serves as a reminder that a well-timed loss can be just as valuable as a well-timed gain,” says Vishal Gehrana, advocate on record, associated with Karanjawala & Co.
Let us say that Mr. Singh has made Rs 80,000 in short-term capital gains by selling shares. He also has made a short-term loss of Rs 30,000 from selling mutual funds. Without tax loss harvesting, she would pay a 20 per cent tax on Rs 80,000. With tax loss harvesting, he can offset his gains from his loss and thus has to pay a 20 per cent tax on Rs 50,000.
Benefits Of Tax Loss Harvesting
Reduced Tax Liability: “Tax liability can be significantly reduced by offsetting capital losses against capital gains, lowering your total income and, consequently, your tax liability,” says Shefali Mundra, Tax Expert, ClearTax.
Carry Forward Of Losses: You can carry forward capital losses and offset them against capital gains for up to eight assessment years.
Portfolio Rebalancing: “Tax-loss harvesting allows you to rebalance your portfolio by selling underperforming assets and investing in better-performing ones,” says Mundra.
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