What Is Tax-Loss Harvesting: Meaning, Rules, and Simple Strategy

When it comes to savings and investing, one of the most important aspects that people explore is taxation. Knowing the right tax rate that will apply to your returns and income can ensure that you know the actual inflow of income you earn. At the same time, knowing direct and indirect taxes is important to plan better.

Apart from this, you would need to pay STCG and LTCG on shares, deposits, mutual funds, and others. But do you know that there is a way to save on these taxes by using the strategy known as tax-loss harvesting?

Now, the question is, what is tax-loss harvesting? Also, it is important that you know the right set of tax-loss harvesting rules in India to avoid penalties. So, read this guide to find everything you need.

What Is Tax-Loss Harvesting?

Tax-loss harvesting means selling an investment at a loss so that the loss can be used to reduce the tax on your gains. If you have profits in some assets and losses in others, you can set them off to save on taxes. The idea is to manage your taxes better. To do this, many investors buy a similar investment again after booking the loss to balance the portfolio and reach goals.

How the Tax-Loss Harvesting Strategy Works in India

Tax-loss harvesting strategy is simple. You aim to reduce your tax burden with proper financial planning. Here is how you can do the same:

Step 1: Portfolio Analysis

Start by checking your portfolio. See which stocks or mutual funds make a profit and which are making a loss. This will help you find positions that can be used to set off. 

Step 2: Book the Loss

Start selling the investments at a loss. This will give you capital losses that you can use to set off your taxes on gains. 

Step 3: Set Off the Loss Against Gains

Use the realised loss to reduce your STCG or LTCG as per tax rules in India. Short-term losses can be set off against both STCG and LTCG. Long-term losses can only be set off against LTCG.

Step 4: Rebalance or Buy a Similar Asset

Now you would need to do portfolio rebalancing. So, you can now buy a similar kind of investment. Since there is no wash-sale rule in India, you can easily buy similar stocks or funds.

Step 5: Maintain Records for Filing

Ensure that you have all documents and transaction details. You would need these when filing for tax returns. 

Example of Tax-Loss Harvesting

Imagine you invested in two stocks.

Stock A: Profit of Rs. 60,000
Stock B: Loss of Rs. 40,000

If you sell Stock A, you owe tax on Rs. 60,000 profit. But if you also sell Stock B, you book the Rs. 40,000 loss. Now, your gain becomes Rs. 20,000 instead of Rs. 60,000. You save tax on Rs. 40,000.

You can buy the same or similar stock or shares later on to balance the portfolio.

Tax-Loss Harvesting Rules in India

You can always go for tax-savings investments. But knowing the right set of tax-loss harvesting rules is important. These are:

1. Short-Term Loss Rules

Short-term capital losses can be set off against both STCG and LTCG. This makes them more flexible. If you cannot use the full loss in the same year, you can carry it forward for up to 8 years.

2. Long-Term Loss Rules

Long-term capital losses can only be set off against LTCG. They cannot be adjusted against short-term gains. These losses can be carried forward for 8 years if not used in the same year.

3. Set-Off Only After Loss Is Realised

A loss counts only when you sell the investment. An unrealised loss shown on your portfolio screen does not qualify for tax set-off.

4. No Wash Sale Rule in India

India does not have a wash sale rule. After selling an asset at a loss, you can buy the same or a similar asset on the same day without losing the right to claim the tax benefit.

5. Loss Carry Forward Requires Filing ITR

You must file your ITR on time to carry forward losses. If the return is late, you lose the right to carry forward those losses to future years.

Pros and Cons of Tax-Loss Harvesting

Tax-loss harvesting can help you reduce taxes, but it works best when used with a clear plan. The method offers strong benefits but some limitations as well. 

Pros

• Lowering taxable gains helps with better tax planning.

• Allows you to stay invested in the same stock with no restriction.

• Supports the best use of market dips.

• Can be carried forward for up to 8 years.

Cons

• Unnecessary selling if not planned well.

• High cost and taxes impact profits.

• Restrictions on long-term capital loss set-off.

• Delay in filing the ITR is possible.

Conclusion

Tax-loss harvesting is a simple. It is a legal way to reduce taxes. This needs no change in your long-term planning. Just by booking losses and gains at the right time, you reduce your tax liability. So, start planning smarter with Rupeezy. Track your gains, use your losses, and have better tax savings.

FAQs

What is tax-loss harvesting in simple terms?

It means selling an investment at a loss so the loss can reduce tax on your gains. It lowers your taxable income legally.

Is tax-loss harvesting allowed in India?

Yes. India allows setting off capital losses against gains, and there is no wash sale rule restricting repurchase.

Can I buy the same stock again after booking a loss?

Yes. You can buy it immediately because India does not have a wash sale rule.

How long can I carry forward losses?

Both short-term and long-term losses can be carried forward for eight years.

Does tax-loss harvesting work for mutual funds?

Yes. It applies to equity and debt mutual funds as long as gains and losses qualify as capital gains.