With the financial year ending today, investors are making last-minute moves to reduce their tax outgo. While many focus on popular options like ELSS or deductions, there is another strategy that often gets overlooked; tax loss harvesting.
This year, has become even more relevant. Stock markets have seen volatility and many investors are sitting on losses in equities. At the same time, assets like gold and silver have delivered strong returns, leading to higher tax liability for some investors.
This creates a unique situation. What looks like a loss in one part of the portfolio can actually help reduce tax on gains in another. Archit Gupta, Founder & CEO, Clear has explained that tax loss harvesting is not just about saving tax today through his LinkedIn post. In some cases, it may be smarter to pay a small amount of tax now to save a much larger amount in the future.
Tax loss harvesting simply means using losses from one investment to reduce the tax on gains from another.
For example, if an investor has made profits in gold or silver and has losses in stocks, those losses can be used to cancel out the profits. This reduces the overall taxable income and lowers the tax bill.
Even if an investor does not have gains this year, these losses can be carried forward for up to 8 years and used to reduce tax in the future.
This financial year has seen a clear difference in asset performance. While equities have seen weakness, gold and silver have delivered strong returns.
This means many investors may be sitting on losses in stocks but gains in commodities. Tax loss harvesting allows them to use those stock losses to offset high-tax gains from gold or silver, which are taxed at rates as high as 30%.
In a recent post, Gupta explained that tax loss harvesting is not just about reducing tax today, but about planning ahead.
He shared an example where an investor had gains of Rs 6,00,000 from gold and silver and losses of Rs 6,90,000 in equities.
By using Rs 6,00,000 of losses, the investor was able to fully wipe out the tax on gold and silver gains.
After this, Rs 80,000 of losses were still left.
This is where the strategy becomes important.
Most investors would use the remaining Rs 80,000 loss immediately to bring their current tax to zero.
But Gupta points out that this may not be the smartest move.
If the investor uses this loss today against equity gains, the tax saving is at 12.5%, which comes to around Rs 10,000.
However, if the same loss is carried forward and used next year against gold gains, which are taxed at 30%, the tax saving increases to Rs 24,000.
In this case, the investor pays a small tax of Rs 3,125 today but saves much more in the next year.
Over two years, the total tax outgo falls from Rs 45,000 to Rs 24,125, leading to a net saving of Rs 20,875.
This strategy works well only if the investor is likely to have gains in the future. If there are no gains, the benefit of carrying forward losses may not be realised.
Also, investors should not sell good quality stocks just to book losses. Tax saving should not come at the cost of long-term investment goals.
With the deadline ending today, investors should review their portfolio carefully.
They should identify loss-making investments, check if they have gains that can be offset, and decide whether to use or carry forward losses.
Tax loss harvesting is not just about saving tax. It is about using losses in the most efficient way.
(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)