Equity investors must look at tax harvesting before March 31 to reduce their long-term capital gains (LTCG) tax liability. It is one of the most effective ways to reduce tax liability. Investors should book LTCG by selling some stocks or a part of mutual fund holdings and then reinvest the proceeds immediately.
As LTCG up to Rs 1 lakh is tax-free in a year, investors can redeem the gain up to Rs 1 lakh. This will ensure they do not become liable to pay higher tax when selling the stocks or redeeming the mutual fund units after a few years. In fact, tax harvesting is ideal for those who invest in equity mutual funds through systematic investment plans as they can redeem units held for more than 12 months and reinvest the gains in the same fund or some other scheme.
In equity-related investments, LTCG tax is applicable on investments sold after 12 months and investors will have to pay tax at 10% on gains made over Rs 1 lakh in a financial year. Short-term capital gains is taxed at 15% if the investments are sold within 12 months.
Book gains, carry forward loss
Equity investors can also set off their long-term loss-making stocks or even mutual fund units against any LTCG. 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. Long-term capital loss can only be offset by LTCG. However, if there are no losses from equity investments in a given year, in that case the investor cannot set off the LTCG.
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If there is any unadjusted capital loss, it 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 LTCG made during these eight years, provided you have filed income tax return (ITR) within the due date.
However, do not sell equity investments just because a particular stock or a mutual fund scheme is making a loss. Analyse the fundamentals of the stock and see if the investments have a long-term growth potential.