Thread by @ETMONEY

A simple hack helps you save tax on #stocks and #mutualfunds.

Here’s what you do:

- Sell your investments
- Book profits & losses
- Repurchase immediately

This is called Tax Harvesting

A 🧵on how it’s done.

Let’s first talk about the #tax on #equities.

The profit you book is divided into two buckets.

1. Shot term: If you sell within one year (of purchase)
2. Long-term: If you sell after one year

You pay a higher tax for short-term profits and lower for long-term (Check table)

Now, let’s jump to the sweet part - how to reduce taxes?

You pay LTCG tax only when your gains exceed Rs 1 lakh.

So the trick is not to let your gains go beyond this tax-free limit.

How to do it? Sell a part of your gains to book LTCG and reinvest it.

An example will help.👇

Assume you invested Rs 5 lakh in an equity fund on 15th Jan 2022.

Say, on 1st Feb 2023 (after 1 yr), the investment value is Rs 5.9 lakh.

Now, if you sell this, your gains will be Rs 90,000.

Your tax liability will be zero.

Reason👉: Your LTCG is below the Rs 1 lakh limit.

Next, you reinvest the entire Rs 5.9 lakh.

Your investment cost will reset to Rs 5.9 lakh.

After a year, say your investment value is Rs 6.5 lakh.

Your gains = Rs 60,000 (6.5 lakh - 5.9 lakh).

Your tax liability = 0

Now, let’s look at what happens if you don’t follow tax harvesting using the same example.

You decide to sell your investment after two years

The LTCG will be Rs 1.5 lakh (6.5 lakh - 5 lakh).

Your tax liability = Rs 5,000 (check calculation below 👇)

👉Here’s how the taxation works:

Total Profit = Rs 1.5 lakh

Taxable Profit = Rs 50,000 (the amount exceeding Rs 1 lakh)

You will need to pay 10% tax on Rs 50,000.

This comes to Rs 5,000.

But as explained above, if you follow tax harvesting, you can save this Rs 5,000.

To keep things simple, we have taken the example of a one-time investment.

But you can use this method even for #SIPs

Redeem units that you have held for more than 12 months and reinvest.

However, if you redeem the units but don’t reinvest, the strategy becomes meaningless.

Not just for gains, the tax-harvesting strategy can be used even when you book losses.

Here’s an example.

You invested Rs 2 lakh in equities on 15th January 2022.

After a year, your #investment value is Rs 1.84 lakh.

Your long-term capital loss is Rs 15,000.

If you book losses, you can use the loss to offset any LTCG you might have received in the year.

If you cannot use your losses in one year, you can carry them forward for up to 8 years.

Check an example 👇

Assume you booked a long-term loss of Rs 15,000 in FY 2022-2023.

After 2 years, you are liable to pay a capital gains tax of Rs 50,000.

You can deduct this Rs 15,000 loss from the tax you need to pay.

(Rs 50,000 - Rs 15,000 = Rs 35,000)

Now, let’s discuss short-term capital gains.

You cannot use the tax harvesting strategy on STCG

Why?🤔

Because STCGs incur a flat 15% tax

But you can use the tax harvesting strategy to book short-term losses

These can be used to offset long-term as well as short-term gains

#Tax gain and tax loss harvesting are simple yet effective ways to bring down your taxes.

But remember, you have to reinvest the money as soon as you get the redemption amount.

Else, you run the risk of breaking your #compounding journey.

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