Zerodha Co-Founder and CEO Nithin Kamath advised investors to consider tax-loss harvesting to reduce tax liability on investments and get better portfolio returns in the long run.
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In a series of tweets, Kamath told investors that successful investing is mostly concerned with “doing boring things well.” One such measure was tax-loss harvesting, which was also “a nice way to get rid of duds in your portfolio," Kamath said.
What is tax-loss harvesting?
Tax-loss harvesting happens when an investor sells some stock holdings at a loss to offset the capital gains he or she has realised by selling assets at a profit. The act of tax-loss harvesting effectively reduces the tax bill as the investor pays taxes only on the net profit, which is the amount gained minus the amount lost in sales. Although the strategy does not help in nullifying the losses, it can reduce the tax burden significantly.
At present, the government levies a 15 percent tax on short-term capital gains on stocks sold before one year of investments.
How does tax-loss harvesting work?
If an investor has made a short-term capital gain of Rs 1 lakh this year, he will have to pay taxes of Rs 15,000. If the same investor holds stocks with unrealised loss of Rs 60,000 and sells them, the short-term capital gain net would come down to Rs 40,000. As a result, the investor would have to pay taxes of Rs 6,000 only, which is 15 percent of Rs 40,000. The whole exercise would help the investor harvest losses and save taxes of Rs 9,000.
How it helps to better portfolio returns?
Investors can fund purchases of similar investments using the proceeds made from selling their floundering assets. This will grow over time and recoup the losses.
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