Stock price gone down? Use 'loss harvesting' by March 31 to reduce taxes for FY19-20, says Zerodha

LTCG is the tax on gains made by selling stocks or equity mutual fund held for more than 1 year. The first 1 lakh of LTCG is tax-free and above Rs 1 lakh, it is taxed at 10 percent per year, Zerodha explains.

With tax loss harvesting, investors can sell a security that has experienced a loss. By "harvesting" a loss, investors can offset taxes on both gains and income.  Most of the investors prefer using this strategy at the end of the financial year when they need to file returns. However, it can be used throughout the year to reduce capital gains.

“Tax loss harvesting starts with sale of the stock or an equity fund which is experiencing a consistent price decline. Investors feel that the security has lost most of its value and chances of a rebound are bleak. Once the loss is realised, investors offset it against capital gains that the portfolio has earned over the period,” according to an income tax e-filing platform ClearTax.

Zerodha explains this with an example.

Suppose an account has Rs 1,08,000 as STCG on which a 15 percent tax of Rs 16,200 is due to be paid; and LTCG of Rs 9,26,000 on which 10 percent above Rs 1 lakh of Rs 82,600 is due. This investor can sell any of the stocks from the list, book the loss, reduce the LTCG/STCG, and save over Rs 98,000 in taxes. The investor would have to make this transaction before March 31, 2020, to harvest losses for FY 19/20, Zerodha adds.