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Tax Loss Harvesting: How does it work?

Tax Loss Harvesting is a strategic approach to set off capital gains earned on stocks & equity mutual funds with capital losses. This ultimately reduces your tax outgo!

The strategy involves selling investments with unrealised losses to offset capital gains realised during the financial year.

Let’s see the math behind Tax Loss Harvesting!

Assume Rahul booked a long-term capital gain (LTCG) of Rs 5 lakh by selling his shares in FY24.

He was wondering if there is any way to reduce his tax outgo on the capital gains earned 🤔

Rahul reviewed his equity portfolio and saw that he has some shares with an unrealised short-term (ST) loss of Rs 3 lakh.

So, he thought of using tax loss harvesting to help him save tax.

Here’s how tax loss harvesting helped Rahul reduce his tax liability 👇

➡️ Rahul had previously booked LTCG of Rs 5 lakh during FY24
➡️ He then booked an ST loss of Rs 3 lakh

Now, his tax liability is on net capital gains
= Rs 5 lakh – Rs 3 lakh
= Rs 2 lakh

A keynote while using tax loss harvesting:

➡️ Long-term capital losses can be set off only against long-term capital gains.
➡️ Short-term capital losses can be set off against short-term or long-term capital gains.

Summing up

Investors generally use tax loss harvesting to optimise their tax liabilities.

However, it is important to consult a tax expert before implementing the strategy and comply with the tax regulations.