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TAX LOSS HARVESTING

TAX LOSS HARVESTING


India’s demat account tally topped the a hundred million-mark for the first time, in August. Over 2. 2 million new accounts -- maximum in 4 months -- have been opened remaining month, taking the cumulative parent to 100. 5 million, consistent with statistics launched by National Securities Depository Limited (NSDL) and Central Depository Services (CDSL). As more and more stock market enthusiast are showing up – a basic concept – Tax loss Harvesting should also be known to us.


Investors who are engaged in daily stock market trading knows when & how to book profits & when to take stop loss.


But mostly what we don’t know how to book losses for our Tax Benefits. This loss booking for tax benefit is called Tax Loss Harvesting.


Let’s explain about basic concept of this –

What is Tax Loss Harvesting?

Tax loss harvesting is when you sell some investments at a loss to offset gains you’ve realized by selling other stocks at a profit. The result is that you only pay taxes on your net profit, or the amount you’ve gained minus the amount you lost, thereby reducing your tax bill.i


It’s one of the most effective ways to reduce tax liability.


Who can do it? In practicality, mostly people having bigger profits from STGC(short term capital gain). Works equally good for LTGC


How to do it?

You can book losses by keeping in mind two situations:

  1. If the stock/mutual funds have lost its value and you don’t find any strength in its comeback. 2. If you can see loss booking at this time will help you minimizing your profits and also the particular script has reached a good support level and script can show a good comeback. (Basically, a win-win situation)


Learning from example? Let’s suppose you are having a STGC of Rs. 50,00,000/- and you also witness some stocks from your portfolio having no intrinsic value for long now & some stocks having intrinsic value which show a huge upside in coming months/years amounting to Rs. 10,00,000/- .


Now, if do math’s here:

Short Term Gain

Tax Working

STGC

50,00,000/-

50,00,000 x 15%

7,50,000/-


With help of Tax Loss Harvesting:

Short Term Gain

Tax Working

STGC

50,00,000/-

50,00,000 x 15%

7,50,000/-

Short Term Loss

(10,00,000/-)

NET GAIN

40,00,000/-

40,00,000 x 15%

6,00,000/-

Saving after Tax loss Harvesting

1,50,000/-

Is it really beneficial? No one like paying more taxes & if by doing such a small check on portfolio can really help us to save taxes then why not do so. Also, this help us in keeping regular check on your portfolio health and makes you better at handling your taxes.


Some facts need to remembered:


  1. Long-term capital losses can be set-off against only long-term capital gains. You cannot set-off long-term capital losses against short-term capital gains.

  2. Short-term capital losses can be set-off against either short-term capital gains or long-term capital gains.

Informative advices:

  1. Tax Loss Harvesting is a great tool used by Investors in Foreign markets.

  2. Nitin Kamath (Zerodha) has said –“ In a series of tweets, Kamath said successful investing is about doing boring things well. "Booking a loss can be painful because we are all loss averse, & we instinctively try to avoid losses. But reducing taxes can add up in the long run & lead to better portfolio returns,"ii


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