Do you recurrently spend money on shares and have booked capital gains by promoting some shares lately? In case you aren’t conscious, these positive factors will be set off towards the losses you will have incurred through one other inventory. This strategy of adjusting the loss towards the acquire is called ‘tax loss harvesting’.
Allow us to perceive with the assistance of an instance. Suppose an investor named Ravi earned ₹2 lakh capital positive factors in a yr by promoting shares of ABC which spiked previously few months. Now, the capital acquire of ₹2 lakh (minus ₹1.25 lakh exemption) stands to get taxed. Nevertheless, Ravi simply realised that he had one other funding during which he reported a lack of ₹75,000. On this state of affairs, he can promote the share to report this loss, which will be adjusted towards the revenue of ₹1.25 lakh.
What’s tax loss harvesting?
That is the method of adjusting capital positive factors earned on one inventory towards the loss incurred by promoting the shares of one other firm.
Why will you promote the share of an organization at a loss?
The shares will be bought solely to purchase later. The intent behind that is to set off the positive factors towards the loss. “Underneath tax harvesting, you should purchase the shares once more quickly after promoting them this yr. In truth, you may promote them within the subsequent monetary yr additionally with the intention to set off the positive factors which accrue throughout that yr,” says CA Chirag Chauhan, a Mumbai-based chartered accountant.
What are the factors that should be stored in thoughts earlier than utilizing this characteristic?
“Buyers should concentrate on the truth that there’s an exemption of Rs. 1.25 lakh on long-term capital acquire underneath part 112A. Additionally, long-term capital loss will be offset solely towards long-term capital positive factors,” says CA Pratibha Goel, a Delhi-based chartered accountant and companion, PD Gupta & Firm, a Delhi-based CA agency.
When does it make sense to promote securities to e book loss?
The securities will be bought to e book loss solely when the whole capital positive factors are greater than the exemption restrict of ₹1.25 lakh.
What’s FIFO methodology in tax harvesting?
FIFO stands for first in first out. This implies the oldest shares are bought first for the convenience of tax calculations.
“In tax loss harvesting, the FIFO methodology is adopted. This implies you probably have the identical inventory giving LTCG and short-term capital loss, it’s essential promote the whole holding to e book loss,” provides CA Pratibha Goyal.
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