What is Tax Loss Harvesting?

Tax Loss Harvesting: Offset realized capital gains with unrealized capital loss to reduce your tax bill!

We have seen a rise in people investing in shares & securities. But part of having a well-diversified portfolio is accepting the reality that while some stocks perform well, you always pick a few duds. This means, not every investment we make can yield profits. Fortunately, investments making losses can have a silver lining: these losses can be used to lower the overall tax liability, putting one’s portfolio in a better position.

What is tax loss harvesting?

Tax-loss harvesting is the practice of selling stocks to realize losses, re-invest those proceeds and hence reduce taxes.

How does it work?

Majority of the investors use this strategy usually at the end of the financial year. But, this strategy can be used all around the year to better plan the capital gains.

Tax Loss Harvesting begins with the sale of investments that have consistently seen a decline in their prices. Once this loss is realized, it can be set off against the capital gains earned on the portfolio over the period.

For better understanding, let’s say Muskan has an STCG of ₹90,000, then she is liable to pay a tax @15%, i.e, ₹13,500.
She holds some stocks that are not performing well and hence have an unrealized loss of ₹50,000. If she sells these stocks and re-invests the same in a similar stock, she can reduce her STCG to ₹40,000. In this case, the tax to be paid will be 15% of ₹40,000, ie, ₹6000, resulting in a tax saving of ₹7,500.

Things to keep in mind

When we set off losses using tax loss harvesting, remember that:

  1. LTCL can only be set off against LTCG, meaning, LTCL cannot be set off against STCG.
  2. STCL can be set off against both STCG or LTCG
  3. Know about the Wash-Sale Rule (applicable outside India), which states that if you sell a security at a loss and buy the same or a “substantially identical” security within 30 days before or after the sale, the loss is typically disallowed for current income tax purposes.

Read more about Tax Loss Harvesting for Stock Traders - Learn by Quicko

1 Like

If we invest in MF through SIP monthly 10K (or yearly 1.2L) for say 12 years for some long-term perspective which is happening after 20-22 years from now. Then would tax-loss or tax-profit harvesting make any sense/useful (assuming the fund is not outperforming etc. or we are not bothering/comparing its performance etc. with others)?
(Note: Read this article to know about tax harvesting: Tax Loss Harvesting: How to Save Tax by Tax Harvesting)
To add more details to my question, in other words: If after 2-3 years the investment of say 2.5L becomes 3.4L then booking profits of 90K being tax-free and reinvesting it on the same day (just suppose) the entire 3.4L and repeating the same process after every 1-2 years for 10 years and then during 20th-22th years the final redemption(s) then would this process of booking profits to take benefit of LTCG (tax-free up to 1 Lakh) make any difference/impact (as every time we are reinvesting entire funds and goal is to keep invested for long term)?

@CA_Niyati_Mistry If you can help here.

Hi @AG_125,

Yes, the cases you have stated can be used for tax-profit harvesting and save taxes accordingly.

Tax loss harvesting is also a way of saving taxes by realizing the unrealized losses and adjusting them against the gains.

Hope this helps!

Hi @CA_Niyati_Mistry,

Thanks for your response. However, I didn’t understand whether tax harvesting would make any sense in this scenario. Let me reframe it as: -

If we invest in MF through SIP monthly 10K (or yearly 1.2L) for say 12 years for some long-term perspective which is happening after 20-22 years from the start of the investment (SIP) i.e. after 12 years of continuous investments (through SIP) we hold the investment for ~8 years. Then would tax-harvesting make any sense/useful as we would be re-investing it including the entire profit?

Thank you.