By its name, you must have got little idea that both terms Tax Gain Harvesting & Tax Loss Harvesting are related to taxation. Both strategies are related to reduction in tax liability.
Many people find taxation a very difficult or boring task. But, in this blog, we will make it simpler for you.
Let’s first talk about Tax Gain Harvesting.
Tax Gain Harvesting:
Tax Gain Harvesting strategy is used in case of the sale of shares or units of Mutual Funds in profit. As there is a ‘Gain’ word, it is related to profit.
Let’s understand this with one example.
Mr. Raj has invested Rs. 15.00 Lakhs in Equity Mutual Funds for 5 years. Now, let’s assume that Mr. Raj has been earning profit Y-O-Y basis and the amount after 5 years has grown to Rs. 22.00 Lakhs. So, Mr. Raj has gained Rs. 7.00 Lakhs.
In this case, what is the tax liability on Rs. 7.00 Lakhs?
As the holding period of units of Equity Mutual Funds is 5 years (i.e. more than 12 months), the Long-Term Capital Gain is applicable in this scenario.
The LTCG up to Rs. 1.00 Lakh is exempt from tax as per the current tax structure. Hence, the tax will be calculated on a gain of Rs. 6.00 Lakhs. As per the current tax structure, a 10% tax is applicable on Rs. 6.00 Lakhs. Hence, the tax amount would be Rs. 60,000/-.
So, how this Tax-Gain Harvesting structure helps reduce tax liability?
As mentioned above, LTCG up to a gain of Rs. 1.00 Lakh is tax-free.
Now, imagine a situation, wherein Mr. Raj had sold the MF units in every financial year in such a way that the gain amount is not more than Rs. 1.00 Lakh. This is called Tax-Gain harvesting.
In this way, Mr. Raj would not have the accumulative gain of Rs. 7.00 Lakhs at the end of 5 years.
What would be the tax liability?
It would be around Rs. 10,000/-. As the LTCG tax is 10%, Mr. Raj is saving Rs. 10,000/- (10% on Rs. 1 Lakh) every year by booking profits up to Rs. 1 Lakh.
So, Mr. Raj will save Rs. 10,000/- for 5 years, amounting to Rs. 50,000/-. Hence, the total tax liability would be around Rs. Rs. 10,000/- (Rs. 60,000/- Less Rs. 50,000/-).
So, we can see a huge difference in tax liability by applying Tax-Gain Harvesting. Cherry on the top is, a gain of up to Rs. 1 Lakh can be invested further to maximize the profits.
Tax Loss Harvesting:
Tax Loss Harvesting is the opposite of Tax Gain Harvesting. In Tax Loss Harvesting you sell shares or units of Mutual Funds when are showing a loss. Interestingly, even with the losses, you still can save some money.
First, you have to check your Realized Capital gain statement for a financial year.
Let’s check out the strategy with an example.
Mr. Raj has invested as under,
(Considering Short Term Capital Gain/Loss)
| Type | Investment Value | Current Value | Profit/Loss |
| Equity Mutual Funds | Rs. 11.00 Lakhs | Rs. 15.00 Lakhs | Profit of Rs. 4.00 Lakhs |
| Direct Stocks | Rs. 10.00 Lakhs | Rs. 9.00 Lakhs | Loss of Rs. 1.00 Lakh |
Now, assume that Mr. Raj has sold his Equity MF portfolio and booked a profit of Rs. 4.00 Lacs (Realized Gain). Considering the profits of Rs. 4.00 Lakhs, Mr. Raj has to pay tax on the same.
Tax liability is Rs. 60,000/- (15% on Rs. 4.00 Lakhs).
What will be the tax liability if Mr. Raj sells the Stock portfolio and booked a loss of Rs. 1 Lakh?
As per Income Tax Rules, you can set off your losses against your profits.
| Income | |
| Profits | Rs. 4.00 Lakhs |
| Less: Set-off Losses | Rs. 1.00 Lakh |
| Net Gain | Rs. 3.00 Lakhs |
So, the Tax liability would be Rs. 45,000/- (15% on Rs. 3.00 Lakhs). You will save tax of Rs. 15,000/-.
The important thing to note here is, you should reinvest the amount of Rs. 9.00 Lakhs in direct stocks to ensure the corpus is intact.
What happens here? Earlier you had the same investment of Rs. 9.00 Lakhs and today also, you are having Rs. 9.00 Lacs in stocks. But, during this selling & buying, you saved Rs. 10,000/-.
In short, selling your loss-making investments today and re-investing them again to save the tax liability is called Tax Loss Harvesting.
But, make sure that you are not taking excessive risks to cover the losses. Tax Loss Harvesting is not an investment strategy. It is just for tax-saving purpose.
There are a few points to remember while setting off losses. Below table will clarify with which gain you can set off your loss.
| Short-Term Capital Gain | Long-Term Capital Gain | |
| Short-Term Capital Loss | Can be set-off | Can be set-off |
| Long-Term Capital Loss | Cannot be set-off | Can be set-off |
To identify short-term & long-term and figure out tax structure, you can read the blog mentioned below.
Calculation : Long-Term Capital Gain Tax in Mutual Fund Investments
Whether you want to apply a strategy of Tax-Gain Harvesting or Tax-Loss Harvesting, you should do (sell) it before 31st March 2023, the last date of the financial year.
All the best!
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