Income Tax News: A smart investing strategy known as “tax harvesting” involves selling assets at a loss in order to make up for profits and lower one’s tax obligation. This technique assists investors in maximising their tax advantages, particularly in relation to long-term capital gains (LTCG). Knowing how to use tax harvesting can improve your investment results in a way that minimises taxes.
Understanding Tax Harvesting and Its Benefits
Selling investments that are in red on purpose in order to balance off profits from other investments is known as tax harvesting. Investors may be able to reduce their taxable income and save a significant amount of money on taxes by realising these losses. By resetting the cost basis of assets, this method is especially helpful in optimising investment portfolios and enabling investors to fully benefit from tax exemptions.
The ₹1 Lakh LTCG Exemption: An Opportunity for Investors
In India, long-term capital gains were exempt from taxation until 2018. But since the LTCG tax was implemented, profits over ₹1 lakh are subject to a 10% tax.
Take Bhupendra for example. After three years of stock holdings, he has an LTCG of ₹3 lakh. He has to pay 10% tax on the remaining ₹2 lakhs after the ₹1 lakh exemption, which means he would owe ₹20,000 in taxes. Ankit, a different investor, uses tax harvesting, in contrast. Every year, he sells select shares that generate profits, reaping gains of up to ₹1 lakh and reinvesting the proceeds right away. Over a period of three years, Ankit also achieves ₹3 lakh LTCG but pays no tax due to systematically realising gains within the tax-free limit each year.
Implementing Tax Harvesting: A Step-by-Step Approach
- In order to keep your real profits within the ₹1 lakh exemption level, you need periodically sell off a portion of your rewarding assets each year.
- To preserve your investment position or reset the cost basis, immediately reinvest the proceeds of your sale in the same or similar assets.
- To further lower your taxable income, use realised losses to offset any gains.
Carry Forward Losses: A Crucial Tax-Saving Strategy
Carrying forward losses is an even more effective tax-saving tactic. It lowers your taxable income in years when you are profitable by allowing you to balance previous losses against future earnings.
Consider Ankit, a stock trader who lost ₹1 lakh. If he fails to file a tax return, he won’t be allowed to carry over this loss. But Ankit can hold off the loss for as long as eight years and use it to offset future profits by filing a return, which will lessen his tax liability.
Filing Returns to Benefit from Loss Set Off and Carry Forward
Even if you have lost money, you still need to complete your income tax return. By doing this, you can make use of those losses in years when you are successful in the future. Only long-term capital gains can be deducted against long-term capital losses, according to the Income Tax Act.
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