What is tax loss harvesting?
Tax-loss harvesting is a practice of selling a security that has incurred a loss to help investors reduce or offset taxes on any capital gains income subject to taxation. This practice is accomplished by harvesting the loss.
Example scenario
- If an individual earns ₹1 lakh in Short-Term Capital Gains (STCG) this year, they must pay 15% of this amount as taxes, which amounts to ₹15,000.
- Additionally, if the individual holds stocks with an unrealized loss of ₹60,000, they can sell these stocks to reduce their net STCG to ₹40,000. This would require paying 15% of ₹40,000, which amounts to ₹6,000 in taxes, resulting in a tax savings of ₹9,000.
- This process of selling stocks to harvest losses and save on taxes is known as tax-loss harvesting.
While there is no explicit regulation in India that disallows tax loss harvesting, in the US, if stocks are sold and bought back within 30 days just to reduce taxes on realised gains, they are called wash sales, and taxes are disallowed to be offset. It is advisable for clients trading and investing in India to consult a Chartered Accountant (CA) while filing income tax returns, as they could potentially be questioned by the income tax authorities during tax scrutiny if the same stock is sold and bought back to save on the taxes.
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