-Kiran Bhave, Financial Freedom Director, AS-44.com
Applicability:
FY 2023-24
If you already hold any of the following for more than 1 year.
– Direct Equity stocks
– Equity Mutual Funds
Tax harvesting in simple words is utilization of the tax exemption given for Long Term Capital Gains on Equity investments to your benefit and maximizing your wealth.
As per current Income Tax rules for AY 2024-25 (FY 2023-24), Long Term Capital Gains (LTCG) realized on equity based investments, during the financial year up to 1 lac is completely taxfree.
You will realize LTCG only when you hold Equity for more than 1 year and sell it during the financial year.
When to do?
Once in an year, preferably close to end of financial year like in Jan, Feb or March month (JFM).
Why to do?
Short answer is to earn more Income!
Let’s see an example. Suppose you invested 5Lacs on 1st January 2023 and it has now grown to 6Lacs giving 20% CAGR. Consider you want to withdraw that amount next year and expect it to grow to 7Lacs.
(Please note that this is just an mathematical illustration to understand tax harvesting. Equity investments shouldn’t be done for 2 years’ time horizon).
So if you book your investments next year after 1st January 2025, you will realize Long term capital gain of 2 lacs and therefore you will incur LTCG tax of Rs. 10000 = 10 % of (2lacs – 1lacs exemption).
But with tax harvesting, you will book the profit of 1 Lac this year by redeeming the entire amount of 6Lacs and reinvesting again the entire 6 Lacs back into the same equity mutual fund/ stocks. Now next year, if it grows to 7lacs, Next year again the LTCG will be 1Lacs (7lacs – 6 lacs) and you will have 0 LTCG tax next year too! So, you saved Rs.10000 worth taxes in just 2 years timeframe. For multiyear scenario, you would keep saving taxes in such a way.
What to do?
If you are a wise equity investor, you should have an annual review of your portfolio anyways in these months. So here are the steps to do (Take help of your financial advisor, if you are not comfortable doing it yourself)
- Check if you have already redeemed equity mutual funds / sold equity shares in the current financial year and LTCG received from it. This can be seen from your portfolio report. Let’s call this as Gain1.
- Identify the Investments (that completed 1 year from date of investment) that fared well and that did not do good during the year.
- Now weed out bad investments, even if that means taking losses, because keeping a bad apple with you for a long time will start stinking! Let’s call this as Loss1.
- If [Gain1-Loss1] itself is >= 1 Lacs, you don’t need to do anything further, as you have already utilized the tax benefit.
- Now find the shortfall which is [1Lac – (Gain1-Loss1)]. Let’s call this as Harvest1. Identify your best Investments that grew good and have unrealized long term profit equal to Harvest1.
- Redeem this Equity Investments so that your overall LTCG is 1lacs
- Immediately, re-invest the amount redeemed in step 6 again back into same equity fund / stocks or other good equity investments that have equal or more potential to grow. This is important as you are a long term equity investor and your financial goal is yet not reached.
- Enjoy your Tax Harvest without hampering your long term investments or goals!
Questions?? Comments?? Ask me now!
-Kiran Bhave
Financial Freedom Director, AS-44.com