Save up to Rs 10,000 income tax on LTCG of Rs 1 lakh through this method: Tax Harvesting

Tax Harvesting: Long-term capital gains was reintroduced in 2018 by Arun Jaitley, the late Finance Minister

Save up to Rs 10,000 income tax on LTCG of Rs 1 lakh through this method: Tax Harvesting
Save up to Rs 10,000 income tax on LTCG of Rs 1 lakh through this method: Tax Harvesting

As the monetary year is going to end, the cutoff time to document charges is additionally drawing closer. 

Tax harvesting is also an option for investors who are still looking for ways to save taxes at the last minute. Therefore, exactly what is tax harvesting? And how is it carried out?

Knowing the equity tax rules is necessary to comprehend tax harvesting. Long-term capital gains, earned by selling equity investments held for more than a year on equities, were reintroduced in 2018 by the late Finance Minister Arun Jaitley.

Long-term gains from equity investments that exceed Rs 1 lakh in a fiscal year are subject to 10% taxation under the law. For momentary increase, the duty is 15%.

Income Tax: What exactly is tax harvesting?

The practice of selling a portion of one's equity units in order to account for long-term capital gains and reinvesting the proceeds in the same stock is known as "tax harvesting." On a Rs 1 lakh long-term gain, one can save up to Rs 10,000 in tax using this strategy.

To put things in perspective, consider the following scenario: an investor invests Rs 5 lakh in January 2022 and receives Rs 5,90,000. Because the invested amount and the gains of Rs 90,000 do not exceed the Rs 1 lakh limit, tax harvesting dictates that the investor should redeem the entire amount and pay no tax on Rs 5,00,000.

This process can be rehashed in the following year. To put things in perspective, investors will be able to redeem the entire amount if the amount increases to Rs 6,50,000 from Rs 5,90,000. This means that the gain of Rs 60,000 (from Rs 6,50,000 to Rs 5,90,000) will not be subject to taxation.

Every time the gain is about to exceed Rs 1 lakh, this procedure can be carried out. Mohit Gang, Moneyfront's co-founder and CEO, says that the amount redeemed should be immediately redistributed in the market.

Negative Effects of Tax Harvesting 
According to Mohit, the negative effects of tax harvesting include the following:

Reinvesting requires investors to take some risks. The possibility that an investor will be unable to reinvest cash flows received from an investment is referred to as reinvestment risk. Simply put, if an investor redeems the money, it may result in a loss when reinvesting if the markets are volatile.

Investigating the portfolio superfluously, financial backers might start taking a gander at their portfolio over and over which can make alarm on the off chance that the business sectors are unstable.

Tax extortion: How can short-term and long-term losses be set off?

Section 112A of the Income Tax Act states:

Only long-term capital gains can be compared to long-term capital losses.

-Either short-term capital gains or long-term capital gains can be used to offset short-term capital losses.

-These losses can also be carried forward for eight years, as Mohit illustrates the process of setting them off. For example, if a person invests Rs 10 lakhs and the investment now amounts to Rs 9,50,000, the person has lost Rs 50,000. In such a scenario, the investor should immediately redeploy the entire amount and redeem Rs 9,50,000. 

The Rs 50,000 loss in his or her books should be accepted. The Rs 50,000 loss can now be carried forward and compared to any gains in the following eight years.