How loss from equities could help you save more tax

Tax harvesting to rescue equity investors: How loss from equities could help you save more tax

When it comes to paying taxes on equities you are liable to pay income tax only when you sell your holdings. While you need to pay taxes on your gains, you also get an opportunity to save taxes in case you incur losses. Short-term capital loss on selling equities can be adjusted against any short-term or long-term capital gains on selling equities. When it comes to long-term capital loss it can be adjusted only against long-term capital gain on equities. You are also allowed to carry over the losses for future years.

This method, which is called tax harvesting method allows individual taxpayers to not pay capital gains tax on their equity shares and mutual funds. However, this method can only be effectively used only if you have long term capital gains (LTCG) on equities up to Rs 1.25 lakh or have any significant loss from equities. The reason for this is because LTCG up to Rs 1.25 lakh is non-taxable though you need to declare this income in the ITR. However, if you have any significant loss, then you can set off it against any capital gains in future and can even carry it forward for up to eight years.

The best part is that the new tax regime does not specifically alter the rules for claiming capital gains losses. Moreover, the new tax regime maintains the same rules as the old tax regime for carrying forward losses.

Read below to understand how this tax planning process works and how you can use it to lower your capital gains tax liability or make it nil.

How do you not pay any capital gains tax on equity shares and mutual funds?

To completely not pay any capital gains tax requires specific and to the point planning. Tax harvesting methods can help you in this planning.

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There are two ways to do tax harvesting, and they are:

Tax loss harvesting
Tax gains harvesting

How tax loss harvesting works

In the tax loss harvesting process you sell the equities which are at loss and then carry forward the loss to set it off with gains in the future years. You can carry forward up to the next 8 assessment years from the assessment year in which the loss was incurred.

Aditi Goyal, tax partner, Trilegal says, tax-loss harvesting involves the transfer of loss-making capital assets towards the end of the financial year.

“This allows taxpayers to set off such losses against capital gains income that has been earned during the year, thereby reducing the overall taxable income for the year. Any excess loss can be carried forward to subsequent financial years to the extent provided in the tax laws. To carry forward losses, taxpayers must file their income tax return for the financial year in which the loss is incurred, on or before the specified due date. Here, it is key to note that capital losses can be carried forward for up to eight years following the year in which such losses are incurred,” she says.

Yogesh Kale, Executive Director, Nangia Andersen LLP adds: “To utilise tax loss benefits it's mandatory to file an Income Tax Return (ITR) within the due date.”

Before using tax harvesting method use set-off provisions to reduce your tax liability

Experts say to make the best utilisation of the available legal statutes; a taxpayer should use the set-off provisions along with the tax harvesting method outlined above. The set off and tax harvesting method can be used by individual taxpayers in old and new tax regimes.

In a nutshell, you can set off your loss with gains and thereby reduce the gains and ultimately the corresponding income tax.

Short term capital loss (STCL) can be set off with short term capital gains (STCG) and long-term capital gain (LTCG)
Long term capital loss (LTCL) can be set off with long term capital gains (LTCG).

The table below shows the above-mentioned set-off rules.

Table of Set-off and carry forwardSource: CA Suresh Surana

Kale explains using some examples:

If an individual has an LTCG of Rs 3 lakh from sale of equity shares or equity-oriented mutual funds and an LTCL of Rs 2 lakh, the net LTCG would be Rs 1 lakh. Since this is within the Rs 1.25 lakh exemption limit, no tax would be payable on this gain.
If an individual has an LTCG of Rs 4 lakh and an LTCL of Rs 2 lakh, the net LTCG would be Rs 2 lakh. Therefore, taxable LTCG would be only Rs 75,000 after adjusting the exemption limit of Rs 1.25 lakh as provided under section 112A.

Surana explains why long-term capital gains loss can’t be set-off with long term capital gains. “In accordance with Section 112A, the Rs 1.25 lakh LTCG exemption is applied before setting off any Long-Term Capital Loss (LTCL). This means that in each financial year, the first Rs 1.25 lakh of LTCG is automatically exempt from tax, irrespective of any losses. Only the LTCG exceeding Rs 1.25 lakh is considered for set-off against LTCL. After adjusting the losses, any remaining LTCG is then subjected to be taxed. Therefore, LTCL cannot be set off against the exempt Rs 1.25 lakh LTCG, but only against the taxable LTCG exceeding this threshold.”

"The new tax regime does not specifically alter the rules for claiming capital gains losses. Thus, in the new tax regime, taxpayers can claim capital gains losses by setting them off against capital gains. Also, the new tax regime maintains the same rules for carrying forward losses, which can be utilized over 8 years against future capital gains," says Surana.

Before using tax loss harvesting method know this

There is a reason why experts say tax loss harvesting method should be done in the last week or preferably in the last day of March. This is because stock prices are volatile and this can potentially derail your set financial plan.

Lovaii Navlakhi, Managing Director and CEO, says, "On the face of it, this seems like a simple idea. However, it is near impossible to be able to predict prices of shares, and hence there may be a gap between the price at which the share is sold and the price at which it is bought. This may result in a benefit or a loss. Moreover, if the sentiment of the market changes - or even that for the share in question - the follow up action may be delayed. With the help of the advisor, you can segregate these two parts - a) book the loss, so that your gains in the year have a lower tax incidence; b) once the year is over, make a plan as to where to deploy the available funds. Once these two steps are delinked in your mind, you may take the actions rationally to your benefit."

Tax gains harvesting

Your long-term capital gain on selling equities or equity mutual fund is exempted up to Rs 1.25 lakh in any given financial year. You can also use this annual exemption limit to bring down your future tax liability. In the tax gains harvesting process you can sell the equities which are at profit but only up to Rs 1.25 lakh profit. You can exercise this option in the last week of March and then buy back the equities in the first week of April. To minimise the opportunity cost of using this strategy, usually the selling is done on March 31 and the buying back of the equities sold is done on April 1 i.e. the next day. Capital gains from selling of equity shares and equity oriented mutual funds is considered long-term if it is sold after holding them for 12 months or more.

However, Monday 31, 2025 is a holiday for stock market so you need to sell the equities on March 28, 2025. This strategy has the risk of adverse stock price movement. The gains from tax harvesting could either be reduced or may even result in loss if the stock prices move up significantly at the time of buying.

How tax gains harvesting works

Here’s an example to show how tax gains harvesting mechanism works:

Mr. A had 2000 shares of a company which he bought at Rs 500 on March 20, 2020. On March 28, 2025 the share price of this company touched Rs 562 (say). So if you sell these shares on March 28, 2025 your long term capital gains (LTCG) will be Rs 2,000*(562-500)= 2000*62= Rs 1,24,000. Since the long term capital gains is less than Rs 1.25 lakh this transaction will not attract any LTCG tax.

Kale, says, “Gains in excess of Rs 1.25 lakh from sale of listed equity shares or equity oriented mutual funds which are held for more than 12 months are subject to Long Term Capital Gain (LTCG) tax at 12.5% rate (plus applicable surcharge and cess). So a taxpayer can opt to book gains on the aforesaid assets up to Rs 1.25 lakh towards the end of the financial year to utilise the exemption limit provided by the statute and repurchase the same assets in the beginning of the next year.”

Kale says, “The gains from the sale of assets have to be reported in ITR and exemption in respect of the same has to be claimed in the return only. The set off and carry forward provisions in respect of capital gains apply to both the tax regimes."

How LTCG is calculated for equity mutual funds post January 31, 2018?

Surana says, "Following the enactment of the Finance Act, 2018, Long-Term Capital Gains (LTCG) on equity mutual funds became taxable, whereas they were previously exempt under the Income-tax Act, 1961. Thus, LTCG on equity mutual funds became taxable at 10% without indexation (enhanced to 12.5% w.e.f. 23rd July 2024) for gains exceeding Rs. 1.25 lakh per financial year. In order to protect past gains, a grandfathering provision was introduced by Finance Act 2018, ensuring that for assets acquired/ purchased before February 1, 2018, the cost of acquisition would be higher of the following:

(i) Actual cost of Acquisition and

(ii) Lower of:

a. The fair market value of the shares as at 31 January 2018 and

b. The full value of consideration received or accruing as a result of the transfer

LTCG is then calculated as the difference between the sale price and this adjusted cost. For assets bought on or after February 1, 2018, the actual purchase price is considered for computing capital gains. This provision helps investors reduce their tax liability by grandfathering/ exempting gains upto 31st January 2018, ensuring fair treatment of long-term investments.

Goyal from Trilegal adds: "In the context of financial year 2024-25, LTCG arising from assets sold on or after 23 July 2024 will be subject to tax at the rate of 12.5% plus applicable surcharge and cess. However, if such gains arose before 23 July 2024, the applicable tax rate would depend on the nature of the asset. To elaborate, in case of LTCG income arising from transfer of listed equity shares and equity-oriented funds (and certain other assets), the applicable rate would be 10% plus applicable surcharge and cess. For LTCG income arising from the transfer of other assets by an individual prior to 23 July 2024, the applicable rate is 20% plus applicable surcharge and cess."

This story originally appeared on: India Times - Author:Faqs of Insurances