{"id":3178,"date":"2024-02-17T05:37:57","date_gmt":"2024-02-17T05:37:57","guid":{"rendered":"https:\/\/1finance.co.in\/magazine\/?post_type=blog&#038;p=3178"},"modified":"2024-07-01T11:42:58","modified_gmt":"2024-07-01T11:42:58","slug":"applicability-of-tax-loss-harvesting-strategy-in-2024","status":"publish","type":"blog","link":"https:\/\/1finance.co.in\/1f-dashboard\/blog\/applicability-of-tax-loss-harvesting-strategy-in-2024\/","title":{"rendered":"Applicability of Tax-Loss Harvesting Strategy in 2024"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">Rohit had a diverse investment portfolio in 2023. By December, he realised he had the following capital gains and losses:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Loss of Rs 1 lakh on sale of equity shares of XYZ Ltd (held for 2 years)<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Gain of Rs 2 lakhs on sale of debt mutual funds (held for 1 year)<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Gain of Rs 80,000 on sale of real estate property (held for 5 years)<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">As per income tax rules, long-term capital losses can be set off against any long-term capital gains in the same year.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">So Rohit, very strategically, decided to reduce his tax liability for 2023. Here\u2019s what he did:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">He booked the Rs 1 lakh loss by selling the XYZ shares, on which he had a long-term loss.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">He adjusted this Rs 1 lakh loss against the long-term capital gain from the debt funds.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">After setting off, the net long-term capital gain was Rs 1 lakh (Rs 2 lakhs &#8211; Rs 1 lakh).<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Short-term capital losses can be adjusted against both short-term and long-term gains.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">By capitalising on the tax loss of Rs 1 lakh on XYZ shares, Rohit reduced his total taxable capital gains for 2022 to only Rs 80,000. This resulted in lowering his income tax liability for the year.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">What you just read is a classic example of Tax Harvesting!<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Tax-loss harvesting refers to the strategy of selling securities (equities, bonds, etc) purposely at a loss to offset capital gains (profit made on sell of properties, securities etc) to reduce tax liability.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">At its core, it uses some specific provisions in tax laws that allow adjusting capital losses against gains.\u00a0<\/span><\/p>\n<h2>Common forms of tax-loss harvesting in India<\/h2>\n<p><span style=\"font-weight: 400;\">Tax-loss harvesting takes various forms in India, with some more straightforward than others.<\/span><\/p>\n<h4><b>Selling loss-making stocks:<\/b><\/h4>\n<p><span style=\"font-weight: 400;\">The simplest form of tax-loss harvesting involves selling stocks on which there are losses, also called loser stocks. By booking the capital losses, they can be adjusted against capital gains from other securities to lower the tax liability. Stocks are normally sold towards the end of the financial year to crystalize losses for claiming tax benefits.<\/span><\/p>\n<h4><b>Booking losses in mutual funds:<\/b><\/h4>\n<p><span style=\"font-weight: 400;\">Tax-loss harvesting can also be done by switching between mutual fund schemes or plans within the same fund house. This involves shifting from one scheme with long-term loss to another direct scheme to realise losses, which can then be adjusted.<\/span><\/p>\n<h4><b>Wash sales:<\/b><\/h4>\n<p><span style=\"font-weight: 400;\">Wash sales means selling a stock or mutual fund at a loss and immediately buying it back. By doing so, the investor books the loss for taxation purposes but remains invested.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">While simpler strategies are usually acceptable, complex loss harvesting plans could raise questions on intention and purpose.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The line between prudent tax planning and unethical tax avoidance is often blurred<\/span><\/p>\n<h2>Income Tax rules applicable in India<\/h2>\n<p><span style=\"font-weight: 400;\">Tax-loss harvesting in India needs to be implemented within the boundaries set by income tax laws. Some key rules are:<\/span><\/p>\n<h4><b>Section 112A\u00a0<\/b><\/h4>\n<p><span style=\"font-weight: 400;\">Section 112A governs Long-Term Capital Gains (LTCG). If the LTCG is more than Rs. 1 lakh from the sale of listed equity shares, equity-oriented mutual funds, or units of a business trust, it incurs a 10% tax without indexation benefits. This tax only applies if the securities transaction tax (STT) was paid during both the transfer and acquisition in specific scenarios.<\/span><\/p>\n<h4><b>Section 111A\u00a0<\/b><\/h4>\n<p><span style=\"font-weight: 400;\">Section 111A of the Income Tax Act, 1961 focuses on Short-Term Capital Gains (STCG). Here, gains from transferring capital assets held for 36 months or less are considered. The tax rate for STCG is based on the individual&#8217;s tax slab.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For listed equity shares, equity-oriented mutual funds, or units of a business trust, if STT was paid during the transfer, the gains are taxed at 15%. However, if STT wasn&#8217;t paid at the transfer, the gains are taxed based on the individual&#8217;s applicable income tax slab rate.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Tax-loss harvesting, therefore, becomes a relevant strategy primarily for assets that do not enjoy this exemption, such as debt funds and debt securities, where any capital gains can be set off against capital losses to reduce the tax liability.\u00a0<\/span><\/p>\n<h4><b>Section 70 &#8211; Set off of losses from one source against another:<\/b><\/h4>\n<p><span style=\"font-weight: 400;\">Section 70 of the Income Tax Act, 1961, plays an important role in the set-off of losses from one source against income from another, within the same head of income.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This provision is particularly important in the context of tax planning and tax-loss harvesting strategies. Here&#8217;s a detailed look at how this works, especially concerning capital gains and losses:<\/span><\/p>\n<p><b>Same Head of Income: <\/b><span style=\"font-weight: 400;\">Losses from one source can be set off against income from another source within the same head of income.<\/span><\/p>\n<p><b>Capital Losses: <\/b><span style=\"font-weight: 400;\">Short-term capital losses can be set off against both short-term and long-term capital gains. Long-term capital losses can only be set off against long-term capital gains.<\/span><\/p>\n<p><b>Against other heads of income : <\/b><span style=\"font-weight: 400;\">Specific Restrictions: Some losses, like speculation losses, are only set off against specific types of income, e.g., speculative profits.<\/span><\/p>\n<p><b>Non-speculative Business Losses:<\/b><span style=\"font-weight: 400;\"> Can be adjusted against any income except salary.<\/span><\/p>\n<p><b>Carry Forward Rules:<\/b><span style=\"font-weight: 400;\"> Unadjusted losses can be carried forward to subsequent years, with capital losses being carried forward for up to eight years.<\/span><\/p>\n<h4><b>Section 73-74 &#8211; Loss carry forward provisions:<\/b><\/h4>\n<p><span style=\"font-weight: 400;\">These sections allow individuals to carry forward capital losses for up to 8 assessment years to offset future capital gains. This essentially extends the time frame for benefiting from tax advantages.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For instance, let&#8217;s say you incur capital losses from selling certain investments. Instead of losing the benefit of these losses in the current year, you can carry them forward for up to 8 years. When you eventually make capital gains in the future, you can utilise these carried-forward losses to reduce your tax liability.<\/span><\/p>\n<h4><b>To wrap up<\/b><\/h4>\n<p><span style=\"font-weight: 400;\">Tax-loss harvesting is a legal and commonly used practice in India to manage tax liabilities. Nonetheless, it&#8217;s important to exercise this strategy responsibly, as any misuse could lead to penalties.\u00a0<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Rohit had a diverse investment portfolio in 2023. By December, he realised he had the following capital gains and losses: Loss of Rs 1 lakh on sale of equity shares of XYZ Ltd (held for 2 years) Gain of Rs 2 lakhs on sale of debt mutual funds (held for 1 year) Gain of Rs [&hellip;]<\/p>\n","protected":false},"featured_media":3179,"comment_status":"closed","ping_status":"closed","template":"","meta":{"_acf_changed":false,"_updated_date":""},"blog-category":[285],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v20.11 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Applicability of Tax-Loss Harvesting Strategy in 2024<\/title>\n<meta name=\"description\" content=\"Tax-loss harvesting one of most popular strategy people put in practice to save tax. 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