Despite the market corrections from mid-January to early-March due to the geopolitical tensions, the benchmark Sensex and Nifty gained 15.7% and 16.5%, respectively in the current financial year (till March 21, 2022). Even the broader market indices such as BSE Midcap and BSE Smallcap gained 17.3% and 34.7%, respectively during the same period.
Equity investors have gained from the surge in the stock prices and the rise in net asset value of equity mutual funds. As the current financial year will end in a week’s time, it is time for equity investors to go for tax harvesting before March 31 and reduce their long-term capital gains (LTCG) tax liability.
Tax experts say tax harvesting is one of the most effective ways to bring down the tax liability in equity investing. However, they caution that the money gained and redeemed must be reinvested immediately for the power of compounding. Neha Malhotra, director, Nangia Andersen LLP, says to reduce tax outflow and earn tax-free returns, one needs to ensure that LTCG from equity without indexation benefit (stocks and mutual funds) do not build up beyond the tax-free limit of Rs 1 lakh.
Since April 1, 2018, if equity shares listed on a stock exchange or equity mutual fund units are sold after 12 months of purchase and the seller makes a gain of over Rs 1 lakh, he has to pay LTCG tax at the rate of 10% without the benefit of indexation. On the other hand, if the shares or mutual fund units are sold within 12 months of purchase and the seller makes any gain, then he will have to pay short-term capital gains tax of 15%.
This year’s Union Budget has provided relief in the rate of surcharge for LTCG for high net worth individuals with income above Rs 2 crore. The rate of surcharge on LTCG has been capped at 15% instead of the higher surcharge rate of 25% or 37% applicable to them at present.
Those investors who have a large portfolio of stock and equity mutual funds will have higher incremental gains. They must harvest the gains to ensure that they do not build up beyond the tax-free limit and pay higher tax when selling the stocks or redeeming the mutual fund units. An investor can book some LTCG by selling some stocks or a part of mutual fund units and then reinvest the proceeds in the same fund or buy some more stocks. There are certain minor charges for tax harvesting such as security transaction tax, stamp duty and brokerage.
Harvesting capital loss
Harvesting capital loss is just the reverse of harvesting gains. Long-term capital losses can be set-off against any other long-term capital gains. In case of loss from equity investing, investors can book losses and then set-off short-term capital losses against short-term or long-term capital gains from any other investments to bring down their tax liability. Also, the Income Tax Act has a provision where the unadjusted capital loss can be carried forward to following eight assessment years from the year in which the loss was booked and adjusted against any short-term or long-term capital gains made during these eight years, provided the investor has filed income tax return (ITR) within the due date.
Notably, all ITR forms notified by the Central Board of Direct Taxes allow setting-off of losses, in accordance with the provisions stipulated under the Act. Hence, investors can set-off capital losses by making complete disclosures in its respect under Schedule CG at the time of filing of the return of income.
- Tax harvesting is one of the most effective ways to bring down the tax liability in equity investing.
- Book long-term capital gains by selling some stocks or a part of mutual fund holdings and then reinvest the proceeds immediately to benefit from power of compounding.
- Since April 1, 2018, if an equity investor makes a gain of over Rs 1 lakh in a financial year, he has to pay long-term capital gain tax at the rate of 10% without indexation benefit.