Tax Loss Harvesting and Its Advantages,in Investment Parlance

Tax Loss Harvesting and Its Advantages,in Investment Parlance

Investors adopt this strategy during the financial year-end.Also this approach can be executed at any time of the year.

In this approach,an investor tends to sell the equities or equities dominated instruments which are experiencing a fall in their value. These securities are sold if an investor believes that there is a bleak chance of them,rebounding from current levels.

This loss thus booked gets adjusted to the capital gains booked in other securities in the portfolio.This strategy lowers the net capital gain for investor, thereby reducing his tax liability for the year.

Simple Steps for Tax Harvesting

1. Identify stocks that have seen a constant decline and ones that have lost enough value that they may not recover soon enough.
2. Sell them off and book losses. The capital losses can be offsetted against capital gains you have made in your portfolio.Long term capital losses can be set off only against long term capital gains, but short term capital losses can be set off against both short term and long term capital gains in your holdings.

How to Maintain Asset Allocation Post Applying Tax Loss Harvesting Strategy

Investors cud also buy shares of the same sector from the sale proceeds he received after booking losses, to maintain sectoral balance of the portfolio and healthy diversification.

Important Capital Gain Tax Rules For Better Personal Finance and Tax Loss Harvesting Rules

Short-term gains can’t be used to set-off Long-term losses.
1. An investor shud estimate tax liability before executing any loss-making trades.
2. An investor shud assess the risk-return profile of an instrument before investing the released capital
3. This method shud be used only for tax saving. It shudn’t drive investments.

To conclude, tax loss harvesting is an important concept which helps in reducing the tax liability that may arise, due to profits booked in both short-term and long-term investments

Long-term capital loss (LTCL) arising out of sale of any capital asset can be used to set off Long term capital gains arising out of sale of any capital asset.

STCL can be used to set off both STCG and LTCG.LTCL can be used to set off only LTCG.

You cud use these set offs across asset classes too.

You can use STCL from sale of debt mutual funds to set off STCG from the sale of equity funds/shares/debt funds/gold/bonds/real estate etc.

You can use STCL from your stocks/equity funds to set off STCG or LTCG from debt mutual funds or other capital assets or even STCG or LTCG on equities booked earlier in the year.

Summarising,U can harvest your losses and make money out of it,if U apply yourself intelligently !!!