As the financial year 2023-24 will come to a close on March 31, taxpayers must be exploring avenues to optimise their tax liabilities. One strategy that savvy investors can use is tax loss harvesting, a method that can enhance tax savings and improve overall portfolio performance.
What is tax loss harvesting?
Tax loss harvesting involves selling investments that have experienced losses to offset gains elsewhere in the portfolio.
By realising losses, taxpayers can mitigate their capital gains tax liability, ultimately reducing their overall tax burden.
This process is particularly relevant for investors with taxable investment accounts.
How does it work?
Investors can analyse their portfolios to pinpoint investments that have depreciated.
Once losses are identified, investors can strategically sell these underperforming assets.
The realised losses can then be used to offset capital gains realised elsewhere in the portfolio, helping to minimise the
tax implications of profitable investments.
For example, if an investor has made a short-term capital gain of ₹1 lakh this year, he/she will have to pay taxes of ₹15,000. If the same investor holds stocks with an unrealised loss of ₹60,000 and sells them, the short-term capital gain net would come down to ₹40,000.
As a result, the investor would have to pay taxes of ₹6,000 only, which is 15% of ₹40,000. The whole exercise would help the investor harvest losses and save taxes of ₹9,000.
Benefits for taxpayers
By managing losses and gains, taxpayers can optimise their tax liability, leading to a lower overall tax bill.
Tax loss harvesting provides an opportunity to review and optimise investment portfolios.
Unused losses can be carried forward to offset future capital gains.
Important considerations
Investors should be mindful of the wash sale rule, which prohibits repurchasing a substantially identical security within 30 days of the sale.
Violating this rule could nullify the tax benefits of the loss.
Investors should consult with financial advisors or tax professionals to ensure that tax loss harvesting aligns with their overall financial strategy and goals.
(Edited by : Amrita)
First Published: Mar 12, 2024 12:31 PM IST
