If you hold stocks or mutual funds in your portfolio that have unrealised losses, you can set off these losses against realised profits on which you have to pay taxes. To do this, you can book the losses, effectively reducing the realised gains and hence also reducing the tax payable. This act of booking unrealised losses is called Tax Loss Harvesting.
Introduction to Taxation
When you invest in the markets, you potentially have two types of taxes —
- STCG (Short term capital gains tax) or tax on gains made by selling stocks or Equity MF held for less than 1 year. Taxed at 15% of the gain.
- LTCG (Long term capital gains tax) or tax on gains made by selling stocks or Equity MF held for more than 1 year. First Rs 1lks of LTCG is tax-free and taxed at 10% above Rs 1lks of LTCG per year.
Do go through the Markets and Taxation module on Varsity for detailed information on taxation when investing or trading.
Tax Loss Harvesting report
We have created a report to help you spot Tax Loss Harvesting opportunities in your account with us. So, if you have realised LTCG or STCG on which you have to pay taxes this financial year, we will list out all your existing holdings that are currently in a loss. You can sell these stocks to book loss to the extent of realised gains, reduce your realised LTCG or STCG, and hence save on taxes that you would have had to otherwise pay.
To access the report, visit Console. Check this example below
In the above case, the account has Rs 1,08,000 as STCG on which a 15% tax of Rs 16,200 is due to be paid; and LTCG of Rs 9,26,000 on which 10% above Rs 1lk of Rs 82,600 is due. This investor can sell any of the stocks from the list in this report, book the loss, reduce the LTCG/STCG, and save over Rs 98,000 in taxes. The investor would have to make this transaction before March 31, 2020, to harvest losses for FY 19/20.
If you intend to hold these stocks and don’t want to sell them, you can buy the stock back after two days of selling. Two days because that is the settlement cycle when you buy or sell stocks. You can also potentially sell your stock holdings and buy similar stocks in the same sector immediately.
If you intend to partially sell a stock that you hold, bought on multiple days or multiple prices, FIFO (First in First out) is applied to determine the realized loss. So when you sell partially, the realized loss may be different to overall loss that you see on your holdings. Make sure to check the breakdown of your holdings in such cases.