Tax Harvesting: Meaning, Strategy, Example And Benefits

Key takeaways 
 

• Tax harvesting is a process by which investors avoid paying tax on their stock earnings. It is done in two ways: tax loss harvesting and tax gain harvesting.
   
• Tax harvesting strategy works under the income tax law in India. In India, there is no wash sale rule like the US.
   
• Earlier, the long-term capital gains (LTCG) tax on equity mutual fund rates were 10%. In 2024, the union budget is 12.5%.

You might have heard about tax harvesting even if you are not into it. I know with this heavy name anyone can be misunderstood. 

Many people think this is a complex financial term and they don't try to learn about it. You know where this concept helps? In tax savings. 

Yes, you heard right. Many people earn a lot but forget about saving tax. But there is a method by which you can save your tax and that is tax harvesting. 

This concept is must known to you if you are a taxpayer in India. And no it's not an illegal method. This is totally legal, so you don't have to worry. 

It helps you make smart financial decisions, let's understand how. 

What is tax harvesting?

I mentioned above the basic idea of tax harvesting. So, you know about the concept. Let's understand now how it works. 

Tax harvesting is the process of selling investments before the end of the financial year to reduce capital gain and save tax.  This process is done under income tax Act, 1961. 

You can minimize your tax burden by using this strategy. There are two ways by which you can implement this strategy: tax loss harvesting strategy and the tax gain harvesting strategy.

Bonus tip - please pay attention, before March 31, check if your profits are around ₹1 -1.2 lakh. You can sell and rebuy to use the tax-free limit and reduce future tax.

Types of tax harvesting 

Investors use two types of tax harvesting methods to reduce their taxes. First is tax loss harvesting strategy and another is tax gain harvesting strategy.

In both these strategies investors should have to sell investment before the end of the year which is March 31. 

Bonus tip - Tax harvesting should be done before March 31 of the financial year, otherwise the benefit will shift to next year and delay your tax saving.

When should you do tax harvesting?

To be honest, this is not something that you can do randomly. It's very important to do tax harvesting on perfect time. Here are some situations when you can do tax harvesting. 
 

• At the end of the financial year.
   
• When you have profit as well as loss in investment.
   
• When your profit is near the tax limit.
   
• If you want to balance your portfolio.

If you plan at the right time, it helps you save tax. And it is totally legal procedure.

Tax harvesting in stocks?

Suppose you bought a share from  a company worth ₹50,000 a year ago and its current price is ₹10000. This extra gain is known as unrealised gain. Because you did not sell that share, so its value is for the present; it can be changed in future, so it is an unrealised gain. 

According to the government of India's guidelines, until you sell stock, there will not be any tax on your gain. At the time of sale, the price will be considered for tax. If in your portfolio only one stock and you do not sell it, then your capital gain is zero for this year. In this case, tax harvest can be used.

Calculation of tax harvest 

Scenario-1

1. You buy one share for ₹10,000 and each year its value rises by ₹10,000 means in the second year it becomes ₹20,000, in the third year it becomes ₹30,000, and so on. In tenth year it became ₹10,00,000. You sold it in ten years.

Your capital gain = ₹10,00,000 - ₹1,00,000

                            = ₹9,00,000

Tax exemption is ₹1,25,000.

                Taxable = ₹9,00,000 - ₹1,25,000 

                              = ₹7,75,000