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Investing, you’re aware that some of your profit is used for taxes. But you didn’t know that you could minimize or even remove this tax? That’s where Tax Harvesting comes in. It’s a strategy to aid investors in keeping their gains and reducing tax expenses. This article will discuss how tax harvesting works, when it should be done, and how you can properly plan tax savings.
WHAT IS TAX HARVESTING?
Tax harvesting is an investment technique that assists in lowering the tax burden. Two primary methods are:
- Tax Loss Harvesting
- Tax Gain Harvesting
Let’s discuss both techniques in detail.
WHAT IS TAX LOSS HARVESTING?
With tax loss harvesting, investors account for losses that can be used to offset gains from other investments. This decreases the net gains and subsequently the total tax bill.
HOW DOES TAX LOSS HARVESTING WORK?
To grasp this principle, let’s consider the rudimentary tax system:
- Short-Term Capital Gain (STCG): Profits from investments up to a period of one year are taxed at 20%.
- Long-Term Capital Gain (LTCG): Profits from investments lasting over a period of one year are exempt to the extent of ₹1,25,000, and charged at 12.5% thereafter.
Example:
- You invest ₹10,00,000 in two funds.
- After 8 months:
- Fund A has a loss of ₹1,50,000.
- Fund B has a gain of ₹2,50,000.
| Funds | Initial Investment | Value after 8 months | Gains/Loss |
|---|---|---|---|
| Fund A | ₹10,00,000 | ₹8,50,000 | -₹1,50,000 |
| Fund B | ₹10,00,000 | ₹12,50,000 | +₹2,50,000 |
Without Tax Loss Harvesting:
- STCG Tax = ₹2,50,000 × 20% = ₹50,000
With Tax Loss Harvesting:
- Net Gain = ₹2,50,000 – ₹1,50,000 = ₹1,00,000
- New STCG Tax = ₹1,00,000 × 20% = ₹20,000
Tax Saved: ₹50,000 – ₹20,000 = ₹30,000
Tax loss harvesting is a clever technique for tax savings and enhancement of post-tax returns. It assists in capital gain management in a efficient manner while utilizing available exemptions.
WHAT IS TAX GAIN HARVESTING?
Tax Gain Harvesting is a technique where investments are redeemed and reinvested every year to minimize tax burden on long-term capital gains.
HOW DOES TAX GAIN HARVESTING WORK?
Let’s assume:
- You invested ₹10,00,000 in a mutual fund in February 2022.
- In February 2025, the value grows to ₹15,20,875 (CAGR: 15%).
Without Tax Harvesting:
- LTCG = ₹15,20,875 – ₹10,00,000 = ₹5,20,875
- Taxable Amount = ₹3,95,875 (After ₹1,25,000 exemption)
- LTCG Tax = ₹3,95,875 × 12.5% = ₹49,484
With Tax Harvesting:
If you sell and reinvest at the end of each year:
| Year | Investment Start | Investment End | Gains | LTCG Tax |
| 2022 | ₹10,00,000 | ₹11,50,000 | ₹1,50,000 | ₹3,125 |
| 2023 | ₹11,50,000 | ₹13,22,500 | ₹1,72,500 | ₹5,938 |
| 2024 | ₹13,22,500 | ₹15,20,875 | ₹1,98,375 | ₹9,172 |
| 2025 | ₹15,20,875 | – | – | 0 |
| Total Tax | ₹18,235 |
Tax Saved: ₹49,484 – ₹18,235 = ₹31,249
Using a basic tax harvesting technique, you save lots of taxes while your investments remain unaffected.
WHERE CAN YOU USE TAX HARVESTING?
Tax harvesting techniques can be used in:
- Equity investments
- Mutual funds
- Capital gains on Indian and US stocks
ADVANTAGES OF TAX HARVESTING
- Optimizes After-Tax Returns – Keeps more profits and maximizes reinvestment gains from compounding.
- Strategic Portfolio Rebalancing – Facilitates realigning investments and keeping tax efficiency intact.
DANGERS OF TAX HARVESTING
- Market Timing – When markets go up after selling, reinvestment might occur at higher prices.
- Liquidity Problems – Brokerage fees and transaction costs can affect returns.
HOW TO PLAN TAX HARVESTING EFFICIENTLY?
Do the following to execute tax harvesting successfully:
- Step 1: Evaluate Your Taxable Profits
Make a list of total short-term and long-term capital profits using your tax returns.
- Step 2: Select Correct Investments
Put aside investments incurring losses and those with high profits.
- Step 3: Time and Dispose Investments
Dispose of investments prior to the end of the financial year (31st March) to trigger gains and losses offsetting.
- Step 4: Plan Reinvestment
Reinvest right away to remain in the market and enjoy compounding growth.
CONCLUDING REMARKS
Tax harvesting is an effective way to minimize tax liability on capital gains while keeping long-term investment growth intact. Through the use of Tax Loss Harvesting or Tax Gain Harvesting, the importance lies in planning wisely and putting it into action before the end of the financial year. By applying tax harvesting strategically, investors can optimize their after-tax returns without compromising the portfolio.
Stay updated, invest intelligently, and save taxes with tax harvesting!