Tax Harvesting: Selling And Re-buying Your Stocks Can Help Reduce Tax Liability

tax harvesting: selling and re-buying your stocks can help reduce tax liability

Tax harvesting is a savvy financial strategy that investors can employ to minimise their tax liabilities on long-term capital gains from equity shares and equity-oriented mutual funds. In India, long-term capital gains (LTCG) on these investments are exempt from income tax up to a limit of Rs 1 lakh per financial year. To qualify as long-term, the assets must be held for more than 12 months. However, it’s important to note that this exemption is applicable only within the specific financial year and cannot be transferred to subsequent years. This means that if investors don’t realize gains by selling their holdings within the year, they risk paying taxes on gains exceeding Rs 1 lakh in future withdrawals.

Tax experts told Economic Times that LTCG exceeding Rs 1 lakh from the sale of listed equity shares or equity-oriented mutual funds, held for over a year, attract a tax rate of 10 per cent, in addition to any applicable surcharge and cess. The taxable amount is calculated as the difference between the sale price and the cost of acquisition. This also includes a ‘grandfathering’ provision for assets acquired before January 31, 2018. This provision allows the cost of acquisition to be considered as the market price on January 31, 2018, potentially reducing the taxable gain.

An effective way to utilise this tax benefit is through tax harvesting, where investors sell their investments to realize profits within the exemption limit of Rs 1 lakh and then repurchase them.

For instance, an investor selling shares at a gain that falls within the Rs 1 lakh exemption can repurchase the same shares, thus resetting their long-term investment period without incurring tax, Economic Times reported.

This means that to benefit from the LTCG exemption in the future, the repurchased assets must be held for at least another 12 months. Selling before this period could result in higher taxes on short-term gains.

Moreover, investors should be mindful of market volatility, as prices can fluctuate significantly. Selling investments for tax harvesting purposes might lead to missing out on potential gains if the market price of the sold assets rises sharply thereafter. Additionally, transaction costs such as brokerage fees, stamp duty, and other charges can diminish the effectiveness of this strategy.