As we know it’s March ending which means the end of the financial year 2021.
We all love to see all the greens in our portfolio, and we know it’s painful to share your gains. When you sell your holding you have to pay tax. Now, this tax may differ according to your holding period. But imagine a way where you could save your gains and that too legally. So, before you all file your tax returns let’s understand Tax Harvesting - a legal way to save your taxes.
Firstly, there are 2 types of taxes on investments.
For example, if you have a stock holding or a mutual fund for more than a year it would be considered as LTCG (Long-term capital gains tax). Where, The first Rs. 1 lakh of LTCG is tax-free, and gains above Rs 1 lakh are taxed at 10% LTCG per year.
Now, if you sell your holdings before one year, you will be taxed under STCG (Short term capital gains tax) or tax on gains made by selling stocks or equity mutual funds held for less than 1 year which are taxed at 15% of the gains.
So, let’s understand Tax-Loss Harvesting:
Tax-loss harvesting is basically used to reduce tax liability on investments. In tax-loss harvesting, you sell your stocks/fund units at a loss to reduce your tax liability on capital gains.
Assume you hold a stock that has unrealized losses, this can be set off against the realized profits, on which you have to pay tax. So to save your tax you can book your losses, which will reduce unrealized profits but you can rebuy them at the same price.
Will it affect my compounding?
Compounding means you are holding a security for a long period of time on which you have great conviction. But suppose you sell your stock at Rs. 100 and rebuy it at Rs.100 it won’t affect your compounding.
If you are worried about price volatility here is a simple hack. Suppose you have decided to sell 100 stocks of A. At this same time if you put a buy order for 100 stocks of A it will work and you won’t have to fear price volatility.
At which price tax will be imposed? If you had 10 stocks of A in January and then you bought another 8 in April and you want to sell 9 of them now. Here FIFO (First In First Out) rule will be applied. And 9 stocks from January will be tax applicable.
Remember Long term Capital Loss can only be offset with Long Term Capital Gain.
And Short Term Capital Loss can only be offset with Short Term Capital Gain.
This simple trick will help you to save taxes and that too legally!
We keep bringing such insightful topics regularly.