Tax harvesting is a strategic way to save on taxes by selling investments to either book gains or losses. The idea is to reduce your overall tax burden by carefully timing these transactions. You can offset gains with losses or make use of tax exemptions provided under the Income Tax Act. In India, tax harvesting is common for equity investments and mutual funds. Capital gains taxes can have a big impact.

Methods of tax harvesting:

Tax-Loss Harvesting:

• Identify underperforming assets: Review your investment portfolio and identify positions that are at a loss. These can be individual stocks, mutual funds, or exchange-traded funds (ETFs).

• Sell at loss: Sell the investments that are at a loss to realize the loss. This can offset any capital gains you’ve realized in other investments, reducing your taxable income.

• Offset capital gains: The losses can offset both short-term and long-term capital gains. However, long-term capital losses can only offset long-term capital gains, while short-term capital losses can offset both short-term and long-term capital gains.

• Reinvest: Tax-loss harvesting can also be a good opportunity to rebalance your portfolio. If you sell a losing investment, consider reinvesting in a mix of other investments. This will help maintain your asset allocation. When tax harvesting, remember that equities use FIFO for sales. It means the oldest shares are sold first. The average price is not taken into consideration.

• Loss Carry-forward: Losses can be carried forward for up to 8 years from the year they were incurred. However, if the return is not filed by the due date, the losses cannot be carried forward.

Long-Term Capital Gains Tax Harvesting:

Since LTCG tax applies to capital gains above ₹1.25 lakhs, you can reduce your tax liability by limiting your gains. Monitor your gains and consider selling the investment before they exceed ₹1.25 lakhs.

Description	Amount (₹)
Total Sale Amount	₹10,00,000
Cost of Investment	₹7,50,000
Long-Term Capital Gain	₹2,50,000
Exempted Limit (₹1.25 Lakhs)	₹1,25,000
Taxable Gain (Exceeding ₹1.25 Lakhs)	₹1,25,000
LTCG Tax Rate (12.5%)	12.5%
LTCG Tax Rate (12.5%)	₹15,625

Instead of selling ₹10 lakhs worth of equity, you can sell ₹8.75 lakhs worth to incur no LTCG tax.

The 2024 Budget has introduced the following changes: The exemption limit for Long-Term Capital Gains on transfer of equity shares, equity-oriented units, or Business Trust units has been raised from ₹1 lakh to ₹1.25 lakh per year. However, the tax rate has increased from 10% to 12.5%.

Benefits of Tax Harvesting:

• Reduce Taxable Income: Tax-loss harvesting helps lower your overall tax liability by offsetting capital gains with capital losses, reducing the amount of taxable income
• Maximize After-Tax Returns: By lowering your tax bill, tax harvesting allows you to keep more of your investment returns, enhancing your overall after-tax returns.
• Strategic Portfolio Rebalancing: Selling underperforming assets provides an opportunity to rebalance your portfolio, ensuring it aligns with your investment goals while minimizing tax impact.

In conclusion, tax harvesting is a smart strategy. It can reduce your taxes and keep your investments on track. By carefully managing gains and losses, you can maximize your returns and maintain a balanced approach to tax planning. It’s a quiet yet effective way to ensure that your money is working as efficiently as possible.