Tax Harvesting

Example

Consider the following scenario in FY 2024-25:

• Long-Term Capital Gains (LTCG): ₹8,00,000 from equity shares/mutual funds

• Short-Term Capital Gains (STCG): ₹3,50,000

• Short-Term Capital Loss (STCL): ₹1,00,000

Tax Calculation (as per 2025 rules):

• LTCG Exemption Limit: ₹1,25,000 (new for FY 2024-25)

• LTCG Tax Rate: 12.5% (on gains above ₹1,25,000)

• STCG Tax Rate: 20%

Before Tax Harvesting:

• LTCG taxable = ₹8,00,000 - ₹1,25,000 = ₹6,75,000 → Tax = ₹84,375

• STCG taxable = ₹3,50,000 → Tax = ₹70,000

Total tax = ₹1,54,375

After Tax Harvesting (offsetting ₹1,00,000 STCL):

• Adjusted STCG = ₹3,50,000 - ₹1,00,000 = ₹2,50,000 → Tax = ₹50,000

• LTCG tax remains = ₹84,375

Total tax = ₹1,34,375

Tax Saved: ₹20,000

Key Components

1. Identifying Loss-Making Assets: Review your portfolio for investments trading below the purchase price.

2. Selling to Realise Loss: Sell these assets to book a capital loss.

3. Offsetting Gains: The realised loss can offset both short-term and long-term capital gains. However, long-term capital losses can only offset long-term capital gains.

4. Carry Forward: Unused losses can be carried forward for up to 8 assessment years, provided they are declared in your Income Tax Return (ITR).

Benefits of Tax Harvesting

• Reduces Tax Liability: It directly lowers the amount of tax you pay on capital gains.

• Portfolio Optimisation: Helps remove underperforming assets and allows for better portfolio rebalancing.

• Carry Forward Losses: Unutilised losses can be carried forward for up to 8 years, which can be offset against future gains.

• Works in Both Old and New Tax Regimes: It can be applied regardless of whether you are under the old tax regime or the new one.

Challenges of Tax Harvesting

• Record-Keeping Complexity: Requires careful tracking of transactions and losses, which can be cumbersome.

• Potential Portfolio Disruption: Frequent selling of assets for tax benefits might disrupt long-term investment strategies.

• Timing Issues: The transactions must be executed before the financial year ends (by March 28, 2025, for FY 2024-25).

• Overemphasis on Tax: Focusing too much on tax savings could lead to poor investment decisions, neglecting the overall investment strategy.

Conclusion

Tax harvesting is a useful tool for Indian investors in 2025, especially with the new exemption limits and tax rates. While it requires diligent record-keeping and timely action, it can significantly reduce your capital gains tax burden, helping you optimise your investment strategy.