Tax Harvesting is a legal and smart way to reduce your tax liability on Long Term Capital Gains (LTCG) from equity mutual funds and stocks.
The ₹1 Lakh Exemption
As per current tax laws, LTCG on equity shares and equity mutual funds up to ₹1 Lakh in a financial year is tax-free. Gains above ₹1 Lakh are taxed at 10%.
How Harvesting Works
Tax harvesting involves selling your equity investments to book Long Term Capital Gains (which are over 1 year old) up to ₹1 Lakh and then immediately reinvesting the proceeds.
Steps to Harvest
- Identify investments where you have LTCG.
- Sell units/shares to realize gains up to ₹1 Lakh.
- This gain is tax-free.
- Buy back the same units/shares immediately (or the next day).
Resetting Cost
By harvesting, you effectively increase your "Cost of Acquisition" to the current market price. This reduces your future tax liability when you eventually sell for good.
Example
You bought units for ₹2 Lakhs in 2020. Current value is ₹2.9 Lakhs. Gain is ₹90,000.
Action: Sell and Reinvest.
Benefit: The ₹90,000 gain is tax-free. Your new buy price is ₹2.9 Lakhs. If you
sell later at ₹3.5 Lakhs, your tax will be on (3.5 - 2.9) = ₹60,000, instead of (3.5 - 2.0) =
₹1.5 Lakhs.
Conclusion
Tax harvesting is a simple yet effective strategy to save up to ₹10,000 in taxes every year (10% of ₹1 Lakh). Make it a habit to review your portfolio every March.