- Date : 31/01/2023
- Read: 3 mins
Tax loss harvesting for lowering tax liability
What is the one thing that investors look for in any investment avenue?
The answer is simple – returns.
Every investor wants to earn the maximum possible returns from their investment. That is why he invests in lucrative avenues to create wealth. However, in the case of market-linked avenues, especially equity, there are chances of a loss.
If you have invested in equity and the equity market suffers a loss, your investment also yields a loss. In this case, you might suffer capital erosion or an overall loss on the investment. While such losses might be difficult to avoid, you can use them to your advantage.
Yes, you heard it right. Investment losses can prove beneficial as they help in lowering tax liability. Let’s understand how.
Tax loss harvesting – the concept
There’s a concept of tax loss harvesting wherein you can use the losses suffered to offset the profit you have made from your investments. As the profits are reduced, your tax liability also reduces.
Let’s elaborate.
Suppose you have invested in equity and debt instruments and the gains and losses from your investments are as follows –
The tax implication of the first two instances will be as follows –
- LTCG on equity – Rs.1 lakh exempted from tax. Excess of Rs.50,000 taxed at 10%. Thus, the tax liability is Rs.5000.
- STCG on dent – Rs.25,000 taxed at your slab rates. Say you fall in the 30% tax slab, the tax liability will be 30% of Rs.25,000, i.e., Rs.7500.
So, the overall tax liability will be Rs.5000 + Rs.7500 = Rs.12,500
However, you can offset the loss of Rs.25,000 against the gains that you have made. The loss can be offset against the equity LTCG of Rs.50,000. This would reduce the taxable LTCG to Rs.2500, and your tax liability will be Rs.2500 (10% of Rs.25,000). If the debt tax liability stays the same, the overall tax liability will be Rs.2500 + Rs.7500 = Rs.10,000.
Thus, the loss of Rs.25,000 helped you save a tax of Rs.2000. This is how tax loss harvesting works.
Related - Paying taxes for the first time? Here's what you should know
Things to remember
While tax loss harvesting helps reduce tax, here are some things that you should keep in mind –
If you have incurred a long-term capital loss, it can be offset only against long-term capital gains. You cannot offset such a loss against short-term capital gains.
In the case of short-term capital loss, either type of capital gain can be used. You can offset the loss against both long-term and short-term capital gains.
So, if you have suffered a loss on an investment, don’t let the loss go to waste. Utilize it for tax loss harvesting and reduce your tax liability.
Related - Check out some tax-saving options if you fall in the highest tax bracket of 30%
See this video to understand tax loss harvesting in mutual funds
What is the one thing that investors look for in any investment avenue?
The answer is simple – returns.
Every investor wants to earn the maximum possible returns from their investment. That is why he invests in lucrative avenues to create wealth. However, in the case of market-linked avenues, especially equity, there are chances of a loss.
If you have invested in equity and the equity market suffers a loss, your investment also yields a loss. In this case, you might suffer capital erosion or an overall loss on the investment. While such losses might be difficult to avoid, you can use them to your advantage.
Yes, you heard it right. Investment losses can prove beneficial as they help in lowering tax liability. Let’s understand how.
Tax loss harvesting – the concept
There’s a concept of tax loss harvesting wherein you can use the losses suffered to offset the profit you have made from your investments. As the profits are reduced, your tax liability also reduces.
Let’s elaborate.
Suppose you have invested in equity and debt instruments and the gains and losses from your investments are as follows –
The tax implication of the first two instances will be as follows –
- LTCG on equity – Rs.1 lakh exempted from tax. Excess of Rs.50,000 taxed at 10%. Thus, the tax liability is Rs.5000.
- STCG on dent – Rs.25,000 taxed at your slab rates. Say you fall in the 30% tax slab, the tax liability will be 30% of Rs.25,000, i.e., Rs.7500.
So, the overall tax liability will be Rs.5000 + Rs.7500 = Rs.12,500
However, you can offset the loss of Rs.25,000 against the gains that you have made. The loss can be offset against the equity LTCG of Rs.50,000. This would reduce the taxable LTCG to Rs.2500, and your tax liability will be Rs.2500 (10% of Rs.25,000). If the debt tax liability stays the same, the overall tax liability will be Rs.2500 + Rs.7500 = Rs.10,000.
Thus, the loss of Rs.25,000 helped you save a tax of Rs.2000. This is how tax loss harvesting works.
Related - Paying taxes for the first time? Here's what you should know
Things to remember
While tax loss harvesting helps reduce tax, here are some things that you should keep in mind –
If you have incurred a long-term capital loss, it can be offset only against long-term capital gains. You cannot offset such a loss against short-term capital gains.
In the case of short-term capital loss, either type of capital gain can be used. You can offset the loss against both long-term and short-term capital gains.
So, if you have suffered a loss on an investment, don’t let the loss go to waste. Utilize it for tax loss harvesting and reduce your tax liability.
Related - Check out some tax-saving options if you fall in the highest tax bracket of 30%
