The thought of dealing with taxes and other regulations is an intimidating obstacle for investment novices. So, thoroughly understand the implications of venturing into any Short-Term Captial Gains (STCG) or Long-Term Captial Gains (LTCG). Like in 2018, the late Finance Minister Arun Jaitley re-instated LTCG on equities. It posed a threat to investors who wanted to increase their wealth through smart investments.
Furthermore, STCG and LTCG are taxable by 15% and 10%, respectively, for profits over and above ₹ 1 lakh. However, employing the benefits of tax-loss harvesting can remedy such woes.
Tax-loss harvesting is a resourceful method that offsets the capital gains made through equity against the capital loss suffered to pay lower taxes. It allows you to increase your post-tax returns on equity-based investments indirectly. Most people apply tax-loss harvesting for STCG since its tax rates are higher than LTCG.
Regardless, you can choose to use this method for either of them. Depending on how long you remain invested, your capital gains made through equity funds may be taxable.
Tax-loss harvesting begins when some of your stocks or equity consistently perform poorly. You could sell your stocks or funds at a loss and reinvest them immediately after to reduce your tax liability on capital gains. This allows you to offset the loss against the capital gains earned by your portfolio over the period.
Want to learn how to use tax-loss harvesting? Follow these simple steps!
While harvesting your capital losses, check out some of the other advantages of tax-loss harvesting.
Most investors don’t always create an exit plan for their investments, despite investing more each year. However, if your investments could make it beyond 10 years or so, you could enjoy the benefits of time value savings. Instead of paying taxes on STCG, opt for LTCG for postponed tax liabilities with low tax rates.
Especially beneficial for tax-loss harvesters, financial experts always advise keen investors to maintain a diverse portfolio. You can set off your losses from lower tax asset classes against the gains you earned through higher tax asset classes.
After investing across various sectors in stocks, you may want to opt out and receive the gains earned. Avoid STCG tax of 15% by harvesting short-term capital loss if your other investments have been experiencing losses. After a year, if these stocks happen to turn profitable, your tax liability for LTCG will only be 10%
First-time harvesters, check out this list of helpful tips to consider before trying to reap these benefits.
While exploring the lucrative world of investments, practice tax-loss harvesting through the year or before the financial year ends!