If you've taken a hit in the stock market recently, you’re not alone. But could those losses actually help you pay less in taxes? According to financial experts, a strategy called Tax Loss Harvesting might be worth considering.
The concept is fairly simple: If you’ve made a profit by selling some investments this year, you might have to pay tax on those gains. But if you’ve also got stocks that are currently in the red, selling them before the financial year ends could offset some of your taxable gains.
India’s 2024 budget introduced a 20% short-term capital gains tax on profits from stocks held for less than 12 months. For long-term holdings (over 12 months), gains above ₹1.25 lakh are taxed at 12.5%.
Now, here’s where tax loss harvesting comes in. If you sell loss-making stocks, your total taxable gains shrink, potentially reducing your tax bill.
Let’s break it down with an example
Say you made ₹1,00,000 in short-term capital gains this year. Under the new tax rules, you’d owe ₹20,000 in taxes.
But, let’s say you also have stocks sitting at a ₹50,000 loss. If you sell those before the financial year closes, your net gain falls to ₹50,000. That means your tax bill drops to ₹10,000 instead of ₹20,000.
It’s not a one-size-fits-all trick. If you sell a stock that later rebounds, you might regret the decision. Some investors sell just before the year ends and then buy the same stock back later. But be careful—tax rules might not always allow this strategy without conditions.
Also, not all losses can be offset against all types of gains. The tax laws can be tricky, so experts strongly suggest consulting a financial advisor before making any moves.
If you bought stocks before July 23, 2024, the short-term capital gains tax is 15%, not 20%.
The tax rules differ for mutual funds and other assets, so don’t assume all investments are treated the same way.
Most importantly, don’t make investment decisions just to save on taxes—your long-term financial goals should come first.