March ending means to audit, finance, I-T returns, tax etc… right? But, have you ever thought about your tax and government norms relation!? Basically, what I am trying to tell you is that in our taxation system there are so many so-called loopholes present; which helps you to reduce your tax. This technique is known as tax harvesting. Also, it helps to make your portfolio much more profitable after the taxation. Still wondering, let’s understand how?
What is Tax Harvesting?
In 2018 the Central government introduced some taxation on long term capital gains (LTCG). We have to pay a 10 per cent tax on our long-term capital gains. But this taxation is only applicable over the value of 1 lakh. To understand it easily let’s take an example.
Assume that you invest 1 lakh in ABC company. After 5 years of the span that 1 lakh becomes 10 lakhs. After the plenty gains, you sell off that stack. Now instead of you bring your gain of 9 lakh to your home, you have to pay tax on your gain to the government. You have to pay 10 per cent tax on your LTCG. In our case, the LTCG was 9 lakhs. But 1 lakh is exempt. So, we have to pay tax on 8 lakhs. 10 per cent over 8 lakhs are 80,000 which is payable to government as tax. So, on hand, you bring 8 lakhs and 20,000 to your home. It seems huge money in terms of compounding effect. Now, the question is how to reduce this tax?
Here, our main goal is to reduce the 10 per cent tax on our long-term capital gain by using 1 lakh tax-exempt in every year. Assume instead of holding the 1 lakh amount to 5 years; what if you sell your stack when the LTCG is 1 lakh. By the government rules, you are not eligible to pay any tax on that right? But what about your long-term holdings? You can immediately buy that stack at the same price.
We can do one thing in our trading app. First, put a buy call at the current market price and immediate sale your stock. When you sell off, 80 per cent of the amount is credited to your trading account and you have to manage the rest 20 per cent amount. Now immediate after selling the buy call is executed at the same price and the same quantity. Now you are not eligible for LTCG tax.
For better understanding here we take a single company stack and it sounds very easy. What if you have more than ten scripts in your portfolio. If you scratching you had for the same thing here is the solution. You have to download your trade report and note down which stocks you buy before 365 days. Now, check out if their LTCG is more than 1 lakh combined or not. If the answer is yes, then apply tax harvesting on those particular stocks. The rest of all scripts keep as it is.
What about mutual fund?
In this taxation clause, the long-term capital gain is applicable on the Equity. If you have individual stock then it is applicable but if you have equity mutual funds then this tax is also applicable there. So, the tax exemption of 1 lakh is calculated by combining both your individual stocks as well as your equity mutual funds. If you have equity mutual funds which have LTCG of more than lakh then you also apply this tax harvesting on it. Here you have to be careful about the exit load of your equity mutual fund.
By using these tax harvesting tactics, you can minimize your LTCG. Also, you can increase the profit by using the tax exemption. In India, tax awareness is less. If you have to earn more in long term by compounding than you should know how taxation works in India. We are here to help you; you just have to bookmark the SensexToday. That’s all.