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What is tax loss harvesting?

Tax-loss harvesting is the practice of selling a security that has experienced a loss. By realizing, or "harvesting" a loss, investors are able to offset taxes on both gains and income. The shares have to move out of the demat account through a delivery sell transaction and can be subsequently purchased the next day. 

The sold security is replaced by a similar one, maintaining an optimal asset allocation and expected returns.

For example, assume you have made Rs. 1 Lac in short-term capital gains this year. You will need to pay 15% of this as taxes or Rs. 15000 (STCG). Also, assume that you currently hold stocks that are having an unrealized loss of Rs. 60,000. You can sell these stocks to reduce your net STCG to Rs 40,000. You would hence have to pay 15% of Rs. 40,000 or Rs. 6,000 as taxes  – saving you Rs. 9,000 in taxes. This exercise will let you harvest your losses and save on taxes – hence called tax-loss harvesting.

A report of the tax-loss harvesting opportunity in your account is made available on Console.  

Check out this module on Varsity to learn everything about taxation when trading/investing. 

To learn more about how you can use this strategy to plan your taxes, read this article on Z-connect.


Note:


1. The buy average and P&L in Console is calculated based on the FIFO (First In First Out) method. In case, you have a stock which is under short term loss and long term profit, you will have to sell your entire holding in the stock to book the short term capital loss. This will, however, book the long term capital gains in the stock as well.

2. While computing the long term capital gains and its harvest opportunity, the first 1L of long term gains is tax-free. This is not considered in the tax-loss harvesting report on Console.  

3. When there are no realized profits or if realized losses are greater than the realized profits, there will be no tax-loss harvesting opportunity.  

4. It is advised to verify the buy average and P&L before deciding to sell. It is best to take the help of a CA.