Tax Harvesting | Save taxes on Long-term capital gains

Tax harvesting, also known as tax-gain harvesting is a strategy used to save taxes on long-term capital gains from listed stocks and equity mutual funds.

But first, let’s understand the taxation on these investments.

  • If you sell listed shares or equity mutual funds within 12 months of holding them, any gains are considered short-term capital gains and taxed at a rate of 15%.
  • On the other hand, if you hold these investments for more than 12 months, the gains qualify as long-term and are taxed at 10%. However, you get an exemption of ₹1 lakh and hence, the gains exceeding ₹1 lakh are taxable.

How does tax harvesting work?

Tax gain harvesting strategy leverages the ₹1 lakh exemption available for long-term capital gains from shares and equity mutual funds.

So basically, whenever your long-term capital gains for a financial year are about to exceed ₹1 lakh, simply book the profits and reinvest the entire amount.

Let’s take an example:

You had invested ₹5 lakhs in a mutual fund in Jan 2020. After 12 months, the value of your investment grew to say, ₹5.60L.

If you redeem these units, your long-term gains for the year would be ₹60,000, on which you’d not have to pay any taxes.

Now, you reinvest the entire ₹5.60L.

Again, your gains of ₹90,000 would be exempted from taxes.

This is because every time you reinvest, your purchase cost changes and so do your capital gains.

If you did not harvest these gains, your profits after 2 years would have been calculated based on the original investment amount of ₹5 lakhs, resulting in taxable gains of ₹1.5 lakhs.

Does tax harvesting affect compounding?

Because you are selling your investment every year, a lot of people think that tax harvesting affects the compounding of their portfolio.

However, tax harvesting involves not only selling a part of your investments but also reinvesting the entire proceeds including the profits, and hence this doesn’t affect your compounding.

Hii . I am new to this forum . I use Quicko app to file ITR and pay taxes . Does the quicko app have the tax loss harvesting feature ? Thanks in advance .

Hello @anees

We are building this feature on DIY. However, if you want to get help from our expert, we do provide tax advisory on tax harvesting. You can book a slot from below link:
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Hello, Please consider an example given below.

  1. Stock bought in year 1 of value = 1,00,000
  2. Stock value appreciated after 5 years = 4,00,000
  3. LTCG after 5 years = 3,00,000

Tax harvesting was not used initially. In order to get benefits of tax harvesting selling of same stock need to be done periodically over a period of 3 years and each year 1,00,000 profit is booked and reinvested. This way LTCG amount of 3,00,000 can be saved.

It is more beneficial to use tax harvesting during initial period of stock appreciation compared to later stage.

Please confirm if above understanding is correct.

Hey @Anand_Kamdar,

With tax harvesting, you can make use of the ₹1 lakh exemption and get tax-free gains. However, yes, at later stages your profits may get higher and exceed ₹1 lakh and then you’ll not be able to use this strategy effectively.