The current market correction has led to losses in many equity portfolios. Tax harvesting can help save capital gains tax by booking losses and reinvesting in the same investments. This strategy can reduce or eliminate capital gains tax, resulting in significant tax savings.
Long-term capital gains (LTCG) of up to Rs. 1.25 lakh are exempt from taxation, and any excess LTCG is taxed at 12.5%. Short-term capital losses (STCL) can be used to offset both short-term and long-term capital gains, while long-term capital losses (LTCL) can only be used to offset LTCG.
Unused capital losses can be carried forward for up to 8 assessment years to offset capital gains in future. To make the most of tax harvesting, investors should reinvest the redemption proceeds the next day to reset the acquisition cost and start a new holding period.
Tax harvesting is optional and requires time and effort. However, it can provide significant tax savings, especially for short-term capital gain tax benefits. Long-term investors should weigh the benefits of tax harvesting against their long-term financial goals before deciding to use this strategy.
