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

                     Tax.  = 12.5% of ₹7,75,000

                              = ₹96,875

You have to pay ₹96,875 as tax on your earnings.

2. In the second case, you buy stock for ₹100000 and your gain is ₹100000 but you sell it immediately. Same process you follow for ten years and in the 10th year your capital gain is ₹9,00,000. 

Each year

Realize ₹1.25L gain = ₹0 tax 10 years × ₹1.25lakh                 = ₹12.5L tax-free

                                 = ₹0

If you use tax harvesting you don't need to pay tax.

Tax loss harvesting calculator

Suppose, this year your capital gain is ₹1,00,000. The tax is 20% on it which is ₹20,000. You also have 60,000 unrealised losses in your account now you can sell this. 

By doing this you can decrease net STCG (short-term capital gain) to ₹40,000 and tax on it is ₹8,000 (20% of ₹40,000). Your tax decreases from ₹20,000 to ₹12,000. 

How to practice tax harvesting 

You can follow below steps for tax harvesting. 

1. You need to choose those stocks to sell which you bought 1 year before.
    
2. Check their current price and sell those which are running in profit.
    
3. Before selling this check your accounts and see if you have money to buy other stocks because sold stock money is not credited in your account on the same day.
    
4. Then check for capital gain. It's not necessary to do harvesting in only one match. You can do it in two parts during a year. Because it's not important that you'll always have enough liquidity and share prices can be less than before. 

There are many automatic apps that can do tax harvesting for you. 

Conclusion 

Tax harvesting strategy is used by stock investors, they mainly implement this around 31 March each year. This is mainly useful for large investors. To avoid tax on earnings investors you tax loss harvesting and tax gain harvesting accordingly. Before stepping in this method you should always keep your goals in mind. 

FAQs 
 

Can I sell a stock at a loss and buy it back immediately?

Yes, you can sell stock at a loss and buy it back immediately because India doesn't have a wash sale rule like the US. This strategy is known as tax loss harvesting.

Can I use my stock losses to reduce my salary tax?

No, you can not reduce salary tax by using stock losses. Stock losses only adjust against capital gains. 

What happens if I have more losses than gains this year?

You can carry forward losses for 8 years but you must file ITR on time. 

Do I lose my exemption if I have brought-forward losses?

No, you don't lose exemption if you brought-forward losses.

How does tax harvesting actually work under the new 12.5% LTCG rules?

Tax harvesting under the new rules means earning profit up to ₹1.25 lakh without tax and using losses to reduce extra tax.