Tax Loss Harvesting: Can you save tax on loss in the stock market? Learn how to get the benefit of tax loss harvesting

Tax Loss Harvesting can compensate you for the loss in stocks and can be of great use to you. You can understand Equity Taxation Rules and Tax Loss Harvesting in detail here.

Tax Loss Harvesting: The stock market has been witnessing a decline for the past several weeks. The month of February was not that good for the stock market. Stocks of Adani Group (Adani Stocks) were seen falling, and investors lost thousands of crores in them. At the same time, in the last one week, Vedanta's Share Price has also shown a wobble. In such a situation, the same question is being raised again and again in front of the investors whether to hold the position in the falling market or to exit by selling it. Well, that is a matter of investment strategy. But today we are talking about saving tax on the loss in the market, which is called Tax Loss Harvesting. It can compensate you for some loss in stocks and can be of great use to you. We will first understand Equity Taxation Rules and then Tax Loss Harvesting and know how Loss Harvesting happens and what are its advantages and disadvantages.

The capital gain tax has to be paid on investment in equity

Whenever you invest in equity ie shares, you get a capital gain ie capital gain on it. You have to pay Capital Gain Tax on this. You will have to pay short-term capital gains tax (STCG) or long-term capital gains tax (LTCG), depending on how long you have invested in it. Earlier, you did not have to pay LTCG on the income earned by selling equity, it was completely tax-free, but after the 2018 budget, the rules changed on this. Now you have to pay 10% tax (without indexation) on LTCG above Rs 1 lakh. Whereas the tax rate on STCG is 10%.

What is Tax Loss Harvesting?

Broadly speaking, you can save tax by offsetting loss against the gain in stocks. This is called tax loss harvesting. According to tax experts, if a taxpayer has made a loss in stock in the stock market, he can reduce his tax liability on capital gains tax by selling it. You can do tax loss harvesting on both STCG and LTCG. But usually, more harvesting happens on STCG only because the tax rate is higher in the short term.

Why is there an option to offset the loss?

A question arises why do you get the benefit of offsetting the loss in stocks? Why is it that you can save tax by showing your losses? Actually, investment in the share market brings 100% risk. You do not have any guarantee that you will get a gain, your entire money can also be lost, in such a situation the government gives you a concession that you will be able to save tax by showing your loss in front of profit.

How does Tax Loss Harvesting work?

Suppose you have invested money in an equity share or equity fund, but there is a continuous decline in it. Your stock is trading below the average buying price. If you feel that the stock or fund has lost its value and there is no chance of revival or rebound, then you can sell it at a loss and then file the Income Tax Return and add this loss to your portfolio. Can be shown along with realized capital gains. This will reduce your tax liability (reducing tax liability).

When can you do Tax Loss Harvesting?

When to do tax loss harvesting strategy is generally used at the end of the financial year, so that you can show tax loss before filing ITR. But you can also make a year-long strategy on it.

What are the things to be kept in mind while doing Tax Loss Harvesting?

Tax expert and former president of ICAI (Institute of Chartered Accountants of India) Vaid Jain said that the government has imposed a restriction that you can offset short-term capital loss only from short-term capital gain. Can be offset against long-term capital gains. But the reverse will not happen as the short-term capital gain tax is higher. Short-term capital loss can be set off against long-term gain. That is, "Long-term capital loss can only be set off against long-term capital gain. You cannot set off long-term capital loss against short-term capital gain. Whereas short-term capital loss can be set off against short-term capital gain and Long term capital gains can be set off against both. Tax loss harvesting does not eliminate your loss, but you can definitely heave a sigh of relief by doing tax savings.