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Trading Hacks 101: Tax Loss Harvesting

Do you know that nearly 80% of the Individuals who start trading in stock markets, tend to quit within the first 5 months? And yet every year millions upon millions of Individuals start trading on a full time basis. Many of the aspiring traders try to emulate the work of Mr. Rakesh Jhunjhunwala (the most successful trader of India). But, as George Clooney rightly says in Ocean’s 11 “The house always wins“, most Traders suffer losses more than profits.

Lets look at how you can manage your trading losses and reduce your Tax Liability.

Tax Loss Harvesting

To Understand what is Tax Loss Harvesting, you need to understand certain terminologies.

Realised Loss is the loss which is incurred after selling a share or mutual fund. Subsequently, if a loss is certain on the sale of a share or mutual fund but it hasn’t been sold yet is called an Unrealised Loss.

Similarly Realised Profit is the profit on the sale of a share or a mutual fund. Before the end of every financial year, the stocks that have unrealized losses can be sold. We figured that there are many traders who don’t know that they can convert Unrealised losses into Realised Losses. And by adjusting these losses against Realised Profits, their net Tax liability can be reduced. This is called Tax-loss Harvesting.

Let us understand this further by an example:

Before Tax Loss Harvesting
Realised Profit = INR 3,85,000
Unrealised Loss = INR 1,27,500
Total Income = INR 3,85,000
Tax Liability = 15% of INR 1,35,000 (385000-250000) = INR 20,250

After Tax Loss Harvesting
The trader can sell 300 shares of Crest and 250 shares of Deepakfert to Realise the loss of INR 1,27,500
Realised Profit = INR 3,85,000
Realised Loss = INR 1,27,500
Loss of INR 1,27,500 is set off against Rs. 3,85,000
Total Income = INR 2,57,500
Tax Liability = 15% of INR 7,500 (257500-250000) = INR 1,125

After calculating the Tax Liability, an Individual should decide whether to opt for Tax Loss Harvesting or not. However, if the trader wants to hold the stock, he can buy the stock again in the next financial year so that the portfolio remains unchanged.

Usually, Investors tend to sell winning investments while holding on to their losing investments. Opting for Tax Loss Harvesting would be a life saver for many Traders.

Keep in mind…

Traders who wish to do Tax Loss Harvesting need to understand which loss can be set off against which profits as per the set-off rules of Income Tax Act.

  • Long Term Capital Losses (LTCL) can only be set off against Long Term Capital Gains (LTCG)
  • Short Term Capital Losses (STCL) can be set off against Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG)
  • In no situation Short Term Capital Loss (STCL) and Long Term Capital Loss (LTCL) be set off against any other Income

Also, for the Traders who are planning to pay Advance Tax, it is suggestible that they check for any Unrealised Losses. Because, by setting them against Realised profits they will save on Taxes.

In the above example, the Tax Liability gets reduced to INR 1,125. Even after adding the brokerage fees, the amount will be minuscule in comparison to the Taxes that the traders are liable to pay.

P.S. If you wish to learn more about which losses can be set off against which incomes, we have an article just for that- Set Off and Carry Forward Loss under Income Tax Act

Why is it important now?

We figured that many Traders are unaware of this method of reducing their Tax Liability. Considering that there are nearly 20 Million Traders in India, Tax loss harvesting can dramatically reduce their Tax Liabilities.

Also, you must be aware of the recent sluggish trends of Indian Markets. And hence, many Traders are having heavy Unrealised losses. Ergo, Tax Loss harvesting could be a great opportunity to partially benefit from the sluggish markets.

Since, the financial year is ending on 31st March, managing losses has a paramount importance and Tax Loss Harvesting can really help reduce Taxable Income and thus, the Income Tax Liability.

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Got Questions? Ask Away!

  1. I want to opt for Tax Loss Harvesting to save tax but I still want to hold the stock. What should I do?

  2. I have a Salary Income and I have an unrealized loss from Equity Trading Income. Will Tax Loss Harvesting help me save more on taxes?

  3. Hey @Shweta_Saini

    No, You can only set off long-term capital losses against long-term gains. However, you can set off short-term capital losses against both long-term and short-term capital gains.

  4. Hey @riya_gupta

    You can opt for Tax Loss Harvesting by selling the existing holdings on which there is an Unrealised Loss. Thus, the loss can be adjusted with realised profit to reduce the tax liability.

    However, if you want to continue holding the stock to keep the portfolio unchanged, you can buy the shares again on the next trading day. However, you must ensure that the transaction cost of entering into buy and sell transaction is less than the amount of taxes saved from Tax Loss Harvesting.

    Hope this helps!

  5. Hey @TanyaChopra

    The loss from equity trading cannot be adjusted with Salary Income. Thus, we would suggest not opting for Tax Loss Harvesting since it would not reduce your tax liability.

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