Savvy investors can turn market downturns into tax benefits by reaping losses in a down market. Tax-loss harvesting is a tactic that smart investors use to profit from market declines. This technique allows individuals to sell underperforming stocks during market declines, resulting in losses that can be used to offset capital gains and ultimately reduce their total tax liability.

Harvest tax losses

Selling investments that have lost value to realize a loss is known as “tax-loss harvesting.” By using these capital losses to offset capital gains from other assets, the investor’s taxable income for the year can be reduced.

Founder and Managing Director of Vibhavangal Anukulakara Private Limited, Siddharth Maurya, notes that although long term gains on ₹1 lakh are taxed at 10% and short-term capital gains are taxed at 15%, tax loss harvesting could result in significant savings by offsetting these gains with realized losses.

How does tax deficit harvesting work?

The secret of harvesting tax losses involves finding stocks with lost value and selling them before the end of the financial year. By offsetting other capital gains, this realized loss can reduce taxable income.

While long-term capital losses in India can only be set off against long-term gains, short-term capital losses can be set off against both short-term and long-term gains.

The “sale of linen” regulations

“The wash sale rule, which prohibits claiming the tax benefit if the investor repurchases an identical or nearly identical security within 30 days before or after the sale, should encourage investors to exercise caution. quickly selling and repurchasing the same investment, taxpayers cannot inflict fictitious losses and preserve their market position without actually incurring a loss,” said Siddharth Maurya.

However, tax-loss harvesting doesn’t require changing your investment approach. Investors can reinvest in comparable but separate assets to preserve their preferred asset allocation and take advantage of tax benefits. This strategy allows investors to reduce their tax burden while updating their portfolios and potentially improving their long-term performance.

Tax Collection Strategies

CA Sandeep Agrawal suggests that people looking to reduce their tax liability should sell underperforming investments to offset capital gains. Additionally, he suggests investing in alternative growth mutual funds, which allow you to defer paying long-term capital gains tax (LTCG) until the assets are ultimately sold, rather than receiving dividends, which are subject to annual taxes.

Investors are advised to speak to a tax professional or financial planner to better understand how tax-loss harvesting may affect their particular situation and ensure compliance with Indian tax regulations. Keeping up to date with new legislation is crucial as tax laws are subject to change.

Tax2win CEO and co-founder Abhishek Soni says there are a few key takeaways:

• Only long-term capital gains can offset long-term capital losses; short-term capital gains cannot.
• Short-term and long-term capital gains can be deducted from short-term capital losses.
• Realizing losses through the sale of specific assets is known as tax-loss harvesting, although there is no guarantee that the losses will be fully recouped.
• Reinvesting winnings after a losing trade should be done with caution as it may involve more risk.

Soni says “tax-loss harvesting should not be used as an investment strategy.” “It’s not for making investment decisions, it’s a tax saving tool.”

“Tax-loss harvesting allows investors to optimize their taxes and rebalance their portfolios, making it a powerful strategy for reducing tax liability in volatile market conditions,” notes Shefali Mundra, tax expert at ClearTax .

Meanwhile, the benchmark indices, the Sensex and the Niftyhas entered a corrective mode after breaking numerous records this year. The main gauge NSE fell more than 10% from its September record high. But from October onwards, the markets were attacked by the bears. The Nifty fell 2,744.65 points, or 10.44 percent, from its record high, and the benchmark BSE gauge fell 8,397.94 points, or 9.76 percent, from its summit.

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Disclaimer: The views and recommendations expressed above are those of individual analysts and not of Mint. We advise investors to seek advice from certified experts before making any investment decisions.