- Date : 06/11/2022
- Read: 4 mins
Tax Loss Harvesting is a unique opportunity to reduce tax liabilities and utilize the saved money for reinvesting in the financial market.
Investors in the financial market are always on the lookout for ways to maximize their profits and minimize their risk on investments. Saving even a small percentage of the invested money can make a difference as it can be utilized for reinvesting in the market. Tax loss harvesting is one method to reduce the risk in an investor's portfolio and save money simultaneously. Let us understand Tax loss harvesting, its benefits and how to carry it out!
Also Read: Taxes on Sales of Shares
What is Tax Loss Harvesting?
An investor in the financial market has to pay taxes on the capital gains of their investments for the financial year. For example, Long-term Capital Gains of more than Rs 1 Lakh are taxed 10 percent by the government. To save taxes on these Capital gains, an investor can offset the gains against the losses incurred on investments during the year. This strategy implemented to save taxes on an investor's gains while filling out the income tax return is known as Tax Loss Harvesting.
Also Read: Set off stock market losses in ITR
For an investor, Tax loss harvesting has the following benefits:
- Reducing Tax liability - Tax loss harvesting reduces the tax burden on the investor by reducing the losses incurred from capital gains. A reduced income tax liability allows the investor to save money and reutilize it in the financial market.
- Reduced portfolio risk - In order to implement Tax loss harvesting, the investor has to sell some shares. The investor can choose the shares which are not performing well in the market. This reduces the risk of further losses if the price keeps declining. Selling these shares will reduce the risk of losses and reinvesting the saved money will increase the chances of profitability.
Implementing Tax Loss harvesting in a weak market
A weak market is when the price of the stocks in the financial market is declining, and the performance of the financial market is not good. In such a condition, the investors can sell the stocks which they think will not perform well in the future. Even though the investor would incur a loss by selling the stock, it would be limited as the price may continue to decline.
The losses on these stocks can then be reduced from the capital gains made by the investor during the year. This means that the tax will be levied only on the net capital gain earned by the investor during the year. Hence, a weak market is a ripe time for Tax loss harvesting.
Rules for implementing Tax Loss Harvesting
Implementing Tax loss harvesting requires experience in the financial market and the ability to predict the future performance of the stocks. In order to effectively implement Tax loss harvesting, the investor must understand the following rules:
- Long-term capital loss can only be adjusted against long-term capital loss. The investor cannot choose to offset short-term losses against long-term gains or vice versa.
- The investor should not try to time the market to implement the strategy. The investor should focus on limiting the losses and sell the stocks that are declining rapidly.
- Tax Loss Harvesting is limited to several sectors such as the metal, oil, gas, and IT industries.
Tax Loss Harvesting is an opportunity for investors to cut their losses and reduce their tax burden simultaneously. It must be implemented with utmost caution as if incorrectly executed, it can cause more losses and restrict the benefit derived from it. Every investor should utilize Tax loss harvesting to reinvest saved money in the market and increase capital gains.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.