What is tax loss harvesting?

Tax-loss harvesting is the practice of selling a security that has incurred a loss to help investors reduce or offset taxes on any capital gains income subject to taxation. This practice is accomplished by harvesting the loss.

According to the latest budget, securities sold before 23rd July 2024 are taxed at 15%, while those sold on or after 23rd July 2024 are taxed at 20%.

Example scenario

1. An individual earns ₹1 lakh in Short-Term Capital Gains (STCG) this year.
2. If the securities are sold before 23rd July 2024, they must pay a 15% tax on ₹1 lakh, amounting to ₹15,000.
3. If the same individual has stocks with an unrealised loss of ₹60,000, they can sell these stocks to reduce their net STCG to ₹40,000. They would then pay a 15% tax on ₹40,000, amounting to ₹6,000—resulting in a tax saving of ₹9,000.
4. However, if the stocks are sold on or after 23rd July 2024, the tax rate of 20% would apply. For ₹40,000 in net STCG, the tax payable would be ₹8,000, resulting in a tax saving of ₹7,000 compared to the initial ₹15,000.
   

While there is no explicit regulation in India that disallows tax loss harvesting, in the US, if stocks are sold and bought back within 30 days just to reduce taxes on realised gains, they are called wash sales, and taxes are disallowed to be offset. It is advisable for clients trading and investing in India to consult a Chartered Accountant (CA) while filing income tax returns, as they could potentially be questioned by the income tax authorities during tax scrutiny if the same stock is sold and bought back to save on the taxes.

A report of the tax-loss harvesting opportunity in the Zerodha account can be accessed by visiting console.zerodha.com/reports/tax-loss-harvesting/eq.

Visit zerodha.com/varsity/module/markets-and-taxation/ to learn everything about taxation when trading or investing.

To learn more about how this strategy can be used to plan taxes, visit zrd.sh/tax-loss-harvesting-22.

Did you know?

• The buy average and P&L in Console are calculated using the FIFO (First In First Out) method. If a stock under short term loss and long-term profit is held, the entire holding must be sold to book the short-term capital loss. However, this will also book the stock's long-term capital gains.
• While computing the long-term capital gains and harvest opportunity, the first ₹1.25 lakh of long-term gains is tax-free. This is not considered in the tax-loss harvesting report on Console.
• There will be no tax-loss harvesting opportunity when there are no realised profits or if realized losses are greater than the realized profits.
• Verifying the buy average and P&L before deciding to sell is advised. It is best to take the help of a CA.