Tax-loss harvesting is the practice of selling a security that has incurred a loss to help you reduce or offset taxes on any capital gains income subject to taxation.
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
- You earn ₹1 lakh in Short-Term Capital Gains (STCG) this year.
- If you sell the securities before 23rd July 2024, you must pay 15% tax on ₹1 lakh, amounting to ₹15,000.
- If you have stocks with an unrealised loss of ₹60,000, you can sell these stocks to reduce your net STCG to ₹40,000. You would then pay 15% tax on ₹40,000, amounting to ₹6,000, resulting in a tax saving of ₹9,000.
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However, if you sell the stocks on or after 23rd July 2024, the 20% tax rate would apply. For ₹40,000 in net STCG, you would pay ₹8,000 tax, resulting in a tax saving of ₹7,000 compared to the initial ₹15,000.
While India has no explicit regulation that disallows tax loss harvesting, in the US, authorities call stocks sold and bought back within 30 days just to reduce taxes on realised gains "wash sales," and they disallow taxes to be offset.
You should consult a Chartered Accountant (CA) while filing income tax returns, as income tax authorities could potentially question you during tax scrutiny if you sell and buy back the same stock to save on taxes.
You can access a report of the tax loss harvesting opportunity in your Zerodha account by visiting console.zerodha.com/reports/tax-loss-harvesting/eq.
You can learn more about taxation by visiting Markets and Taxation module on Varsity by Zerodha.
Things to keep in mind
- Console calculates the buy average and P&L using the FIFO (First In First Out) method. If you hold a stock under short term loss and long-term profit, you must sell the entire holding 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. The tax-loss harvesting report on Console does not consider this.
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You will have no tax loss harvesting opportunity when you have no realised profits or if your realised losses are greater than your realised profits.
- You will have no tax loss harvesting opportunity in case of synchronised trades, reversal trades or any trading activity that you do not perform in the normal course of transactions.
- Verifying the buy average and P&L before deciding to sell is advised. It is best to take the help of a CA.