Understanding Tax Loss Harvesting

Tax Loss Harvesting is a smart financial strategy used by investors to minimize their tax liability by offsetting capital gains with losses from underperforming investments. Essentially, this involves selling loss-making stocks or securities to counterbalance realized profits, thereby reducing the taxable capital gains.

How does Tax loss harvesting work?

When an investor sells investment that have decrease in value ,the losses can be used to offset gains from other profitable investments . This reduces the total taxable capital gains and ,in turn, lowers the tax liablity.

Note: It is highly recommended that investors consult a Chartered Accountant (CA). Professional guidance from a CA ensures proper execution and compliance with tax laws.

Types of Capital Gains Tax in India

Investors in the stock market encounter two types of capital gains taxes:

1.Short-Term Capital Gains (STCG) Tax:

  • Applies to gains from selling stocks or equity mutual funds held for less than one year.

  • Tax Rate: 20% of the gains.

2.Long-Term Capital Gains (LTCG) Tax:

  • Applies to gains from selling stocks or equity mutual funds held for more than one year.

  • Tax Exemption: The first ₹1.25 lakh of LTCG is tax-free annually.

  • Tax Rate: Gains above ₹1.25 lakh are taxed at 12.5%.    


Loss /Gain type

Set off against

Long-term capital Gain

Short-term capital Gain

Long-term capital Loss

Yes

No

Short-term capital Loss

Yes

Yes

Example1 of Tax Loss Harvesting

Let’s break this down with a simple scenario:

1.Capital Gains and Losses:

  • STCG = ₹20,000

  • STCL (Short-Term Capital Loss) = ₹10,000

2.Tax Calculation:

  • Normally, the tax on ₹20,000 STCG would be 20%, resulting in a tax liability of ₹4,000.

  • However, by offsetting the ₹10,000 STCL, the taxable STCG reduces to ₹10,000.

  • New Tax Liability = 20% of ₹10,000 = ₹2,000.

Result: By utilizing the loss, the investor saves ₹2,000 in taxes.

Example 2

Total STCL

Total STCG

Total LTCL

Total LTCG

30K

20K

40K

40K


Step

Action

Amount Offset

Remaining Amount

1: Offset STCL Against STCG

Use ₹30,000 STCL to offset ₹20,000 STCG

₹20,000 (STCG)

₹10,000 STCL remains (₹30,000 - ₹20,000)

2: Offset Remaining STCL Against LTCG

Use the remaining ₹10,000 STCL to offset part of ₹40,000 LTCG.

₹10,000 (LTCG)

₹30,000 LTCG remains (₹40,000 - ₹10,000)

3: Offset LTCL Against Remaining LTCG

Use ₹40,000 LTCL to offset the remaining ₹30,000 LTCG.

₹30,000 (LTCG)

₹10,000 LTCL remains (₹40,000 - ₹30,000)





Short-Term Opportunity- ₹30,000( ₹20,000 STCG + ₹10,000 LTCG (via STCL))

Long-Term Opportunity - ₹30,000 (LTCG (via LTCL))

Important Note:

Although the transaction appears as a profit in Upstox's Profit & Loss and tax reports, users can present it as a loss to the Income Tax Department. By consulting with their Chartered Accountant, they can use the trade report transactions to offset capital gains and appropriately manage their tax liabilities