What is tax loss harvesting? How does it work? All your queries answered

Do you regularly invest in stocks and have booked capital gains by selling some shares recently? In case you are not aware, these gains can be set off against the losses you may have incurred via another stock. This process of adjusting the loss against the gain is known as ‘tax loss harvesting’.

Let us understand with the help of an example. Suppose an investor named Ravi earned ₹2 lakh capital gains in a year by selling shares of ABC which spiked in the past few months. Now, the capital gain of ₹2 lakh (minus ₹1.25 lakh exemption) stands to get taxed. However, Ravi just realised that he had another investment in which he reported a loss of ₹75,000. In this situation, he can sell the share to report this loss, which can be adjusted against the profit.

What is tax loss harvesting?

This is the process of adjusting capital gains earned on one stock against the loss incurred by selling the shares of another company.

Why will you sell the share of a company at a loss?

The shares can be sold only to buy later. The intent behind this is to set off the gains against the loss. “Under tax harvesting, you can buy the shares again soon after selling them this year. In fact, you can sell them in the next financial year also in order to set off the gains which accrue during that year,” says CA Chirag Chauhan, a Mumbai-based chartered accountant.

What are the points that need to be kept in mind before using this feature?

“Investors must be aware of the fact that there is an exemption of Rs. 1.25 lakh on long-term capital gain under section 112A. Also, long-term capital loss can be offset only against long-term capital gains,” says CA Pratibha Goyal, a Delhi-based chartered accountant and partner, PD Gupta & Company, a Delhi-based CA firm.

When does it make sense to sell securities to book loss?

The securities can be sold to book loss only when the total capital gains are higher than the exemption limit of ₹1.25 lakh.

What is FIFO method in tax harvesting?

FIFO stands for first in first out. This means the oldest shares are sold first for the ease of tax calculations.

“In tax loss harvesting, the FIFO method is followed. This means if you have the same stock giving LTCG and short-term capital loss, you need to sell the entire holding to book loss,” adds CA Pratibha Goyal.

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