Tax-loss harvesting involves selling securities at a loss to offset capital gains from other securities, thus lowering tax liability. According to income tax rules, any profit or gain from transferring a capital asset during the year is taxed under the ‘Capital Gains’ head. It also stipulates that a loss under the capital gains head can be adjusted against a capital gain in the same year or carried forward in subsequent years in case of any unadjusted capital loss.

As the financial year ends, it is usually the time to review the investments and adjust them to optimise tax liability. This exercise is essential because adjusting gains with losses reduces the net capital gain and, thus, the taxpayer’s tax liability. For example, suppose a person earns a profit of Rs 10,000 from selling a security and incurs a loss of Rs 2,000 from selling another security. In that case, the tax will be payable on the net capital gain of Rs 8,000 instead of Rs 10,000.

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Tax harvesting is possible only in case of capital gains and losses. Capital gain or loss means any gain or loss from transferring capital assets like shares, mutual funds, bonds, land, buildings, etc., which are subject to tax under capital gains in the income tax.

Short-Term Capital Gain (STCG) And Long-Term Capital Gains (LTCG):

• The short- and long-term classification is different for different types of securities. For shares and equity-oriented mutual funds, it will be considered short-term if the securities are held for 12 months, whereas for immovable properties, short-term means 24 months.

• If they are held for a longer period, then they will be called long-term capital assets.

Points To Note:

STCG can be adjusted with STCG and LTCG, while LTCG can only be set off against LTCG. Capital losses reported in the income tax return filed before the due date can be carried forward for up to eight successive years from the year the loss was incurred.

How To Do Tax Loss Harvesting?

• First, identify the portfolio’s investment positions, profits earned during the year, and loss-bearing securities and capital assets.

• Determine whether the securities and capital assets are short-term or long-term and their tax implication.

• Identify any loss-making investments that can be sold for tax harvesting and reinvest the proceeds in better avenues to improve the overall portfolio return.

• Remember, tax-loss harvesting is an investment strategy, not just a tax-planning tool, so ensure that selling securities or capital assets for tax harvesting purposes aligns with long-term interests and not just short-term tax benefits.

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In short, plan according to your goal and use tax harvesting judiciously to reduce tax liability and enhance the portfolio. If you have doubts, seek assistance from chartered accountants, certified financial planners, etc.