Tax Harvesting: A Smart Way to Reduce Tax Liability

Introduction

Tax harvesting is a strategic approach to reducing tax outgo by booking gains or losses on investments before the financial year ends. This report explains how to use tax harvesting before March 31 to optimize tax liability.

How to Tax Harvest

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Tax harvesting involves optimizing tax liability through sale transactions of shares and mutual fund holdings. It involves selling investments with book losses to offset realized capital gains, thereby minimizing tax outgo for the year. This process is called tax loss harvesting.

Eligible Equity Assets

For tax harvesting of Rs 1.25 lakh long-term capital gains (LTCGs), listed shares and schemes of equity-oriented schemes are eligible. For loss harvesting, any capital asset qualifying for set-off against capital gains can be used.

Tax Harvesting Limitations

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For tax-free LTCGs up to Rs 1.25 lakh, tax harvesting can be done by March 31. If higher LTCGs are booked, tax at a flat rate of 12.5 percent will be payable on the remaining amount. For booking capital losses, the unabsorbed loss can be carried forward for set-off against capital gains in subsequent years.

Best Practices

To make tax harvesting valid, shares must be sold (delivered) from a demat account. If only one demat account is available, repurchase can be done the next day. Alternatively, if multiple trading accounts are available with separately linked demat accounts, purchase and sale can be executed on the same day in different trading accounts. Redemption and purchase of mutual fund units can be done on the same day with the same net asset value (NAV) to facilitate tax harvesting.