Tax-loss harvesting is the practice of selling a share that is incurring a loss, so that by realizing the loss, you can offset the same against realized gain for the same year and save on taxes. The security has to move out of the demat account by delivery sell transaction and the sold security is replaced by the same or a similar security.

Capital gains means, any gain arising on the sale of capital assets such as real estate, equity or equity-oriented products. Here we are discussing about the capital gains arising on sale of equity and equity-oriented funds. Now, investment in shares or equity oriented mutual funds can be done for short-term or long-term period. Short term means investing for a period of up to 12 months and long-term means investing for a period of more than 12 months.

Any profit or gain arising from stock investment is less than 12 months termed as short-term Capital gains. Until 23^rd July, 2024, short term capital gains were taxed at a flat rate of 15%. As per the new budget announced on 23^rd July, 2024, tax rate on short term capital gains has increased from 15% to 20%.

For example, Mr. A bought 100 shares of Larsen & Toubro ltd at Rs 950 per share on 1^st February, 2024.

Case 1: Shares sold before 23^rd July, 2024

Mr. A sold the same 100 shares of Larsen & Toubro at Rs 1500 per share on 3^rd June, 2024, within 1 year (less than 12 months).

In this case, gains on Larsen & Toubro = Rs. 55,000

Short term capital gain tax = 55000 X 15% = 8,250

Case 2: Shares sold after 23^rd July, 2024

Mr. A sold the same 100 shares of Larsen & Toubro at Rs 1500 per share on 25^th July, 2024, within 1 year (less than 12 months).

In this case, gains on Larsen & Toubro = Rs. 55,000

Short term capital gain tax = 55000 X 20% = 11,000

Case 3: Shares sold before 23^rd July, 2024 and also after 23^rd July, 2024

Mr. A sold 30 shares of Larsen & Toubro at Rs. 1000 per share on 3^rd June, 2024. He sold the remaining 70 shares of Larsen & Toubro at Rs. 1200 on 25^th July, 2024.

In this case, gains on 30 shares = Rs. 1500

Gains on 70 shares = Rs. 17,500

Now, tax will be calculated for the gains according to the tax rates applicable to the date when the shares were sold i.e. pre-budget or post-budget.

Short term capital gain tax on 30 shares = 1,500 X 15% = 225

Short term capital gain tax on 70 shares = 17,500 X 20% = 3,500

Total gains = 3,725

Any profit or gain arising from stock investment are considered as long term capital gains, if the holding period is more than 1 year. Until 23^rd July, 2024, Long term capital gains up to Rs. 1 Lakh in a financial year were exempted from tax. As per the new budget announced on 23^rd July 2024, the exemption has been increased from Rs.1,00,000 to Rs. 1,25,000. The tax rates on long-term capital gains have been increased from the earlier rate of 10% to a new rate of 12.5%.

Example:

Mr P bought 200 shares of Titan Ltd. At Rs. 800 per share on 1^st May, 2023.

Case 1: Shares sold before 23^rd July, 2024

Mr. P sold the same 200 shares of Titan at Rs. 1500 per share on 3^rd June, 2024. Holding period of the shares is more than 12 months.

Long Term Capital Gain = 1,40,000 (Up to Rs 1,25,000 is not taxed as per the provision)

Long term capital Gain Tax= (140000-125000)    = 15,000 X 10% = 1,500

Case 2: Shares sold after 23^rd July, 2024

Mr. P sold the same 200 shares of Titan at Rs. 1500 per share on 25^th July, 2024. Holding period of the shares is more than 12 months.

Long Term Capital Gain = 1,40,000 (Up to Rs 1,25,000 is not taxed as per the provision)

Long term capital Gain Tax= (140000-125000)    = 15,000 X 12.5% = 1,875

Case 3: Shares sold before 23^rd July, 2024 and also after 23^rd July, 2024

Mr. P sold the 90 shares of Titan at Rs. 1500 per share on 3^rd June, 2024. He sold the remaining 110 shares of Titan at Rs. 2000 per share on 25^th July, 2024.

Long Term Capital Gain on 90 shares = 63,000 (Up to Rs 1,25,000 is not taxed as per the provision)

Long Term Capital Gain on 110 shares = 1,32,000 (Up to Rs 1,25,000 is not taxed as per the provision)

In this case, Rs. 70,000 will be taxed at the new rate of 12.5%.

(Computation of 70,000 = 1,25,000 – 63,000 – 1,32,000 = 70,000)

Client would need to make these transactions before March 31, 2024 to harvest losses for Financial Year 2023-24.

The terms used in the Tax Loss Harvesting page on our website are explained below:

1. Realised profits – Shows the profits realised upon the sale of shares, in the short-term or long-term

2. Unrealised losses – Shows the losses incurred by the customer on sale of shares

3. Tax Liability – Shows the amount of taxes the customer is liable to pay before offsetting losses
4. Tax Saving opportunity – Shows the amount of tax that can be saved by realizing unrealized losses (Note that if unrealised losses are higher than realised gains, the tax saving opportunity amount will remain the same as tax liability)

Other points to remember:

1. If there are no realised profits or if the unrealised losses are greater than the realised gains, there will be no tax saving opportunity.
2. The FIFO (First-In First-Out) method is used in Tax Loss Harvesting. If you have holdings making short-term losses and long-term profits in the same stock, the entire holding that is making long-term profits needs to be sold in order to book short-term losses. This will simultaneously book the long-term capital gains for that stock.

As per Finance Act 2020 shareholders will have to pay the tax on dividend income as per their tax slabs at and additional TDS would be charged at 10% if the dividend from any company received exceeds Rs 5000.