Just we have passed the crop harvesting season and its time to think of tax harvesting now. As we are nearing the financial year end, we are left with just few days to plan our tax. If you have not planned your tax yet, and are puzzled how to do it especially in the light of the proposals in Union Budget 2020, we present you one way to explore tax saving options and that is Tax Loss Harvesting.
What is Tax Loss Harvesting?
While investing in stock, all of us are bound to have some laggard in our portfolio where our hard earned money will be blocked due to negative returns from that stock. Many are left with no option but to hold on to the stock till it turns to be a profitable one. Tax loss harvesting is one tool wherein the stocks that are in loss in our portfolio can be sold and the loss can be set off against capital gains and reduce the tax outgo considerably.
The short term loss from stocks can be adjusted against both the short term capital gains and long term capital gains booked during the financial year. And long term capital loss can be set off only against the long term capital gains.
The unadjusted long term or short term loss in the current year can be carried forward for next 8 consecutive years in case of non-speculative nature (Delivery trades) and in case of speculative nature (intra-day trading) it can be adjusted against short term profits in next 4 years.
Who can use this opportunity?
Investors and traders both can use this opportunity. A trader is the one who trades in futures and options segment, intraday trading in cash segment and/or who trade frequently in equity delivery segment.
An investor is the one who invests and stays invested with a view to derive medium to long term returns on his/her investment.
Approaches to tax loss harvesting
When you want to put to use the laggards in your portfolio and seize this opportunity you can think of two approaches.
If you think there is no scope for the loss making stock in your portfolio to recover
Sell the loss making stock and book the loss. If the stock you sold is bought within a year, then the loss you booked will be a short term loss and this loss can be set off against either your short term profit or long term profit booked in other stocks during the same year.
If the stock you sold is bought more than a year back, then it is a long term capital loss and this loss can be set off only against the long term capital gains booked during the year.
If you think there is scope for the loss making stock in your portfolio to recover
Sell the loss making stock and book the loss. Buy back the stock the next day or immediately after selling to retain them in the portfolio.
By this exercise, you can set off the booked short term loss against short term or long term profits during the year and set off long term loss against long term profit and reduce the tax outgo. And you can continue to hold the stock in your portfolio.
Let us see how we can make the best out of the loss making stocks in our portfolio by an example.
Short term loss is Rs.250,000/-
Short term profit is Rs.100,000/-.
Long term profit is Rs.150,000/-
In this case you need not pay short term capital gains tax @ 15% on short term profit of Rs.100,000/- as you are setting off the profit of one lakh against loss of Rs.250,000/-. And balance we have Rs.150,000 short term loss.
And in case of long term profit of Rs.150,000/- the profit above one lakh is taxable. So taxable profit of Rs.50000 is set off against balance short term loss available. After adjusting this still the short term loss that is left is Rs.100,000.
So, balance 1 lakh short term loss can be carried forward to next year and suppose you are adjusting Rs.50,000/- in next year, still you have 50,000 more that can be carried forward to third year.
How to do this with Tradeplus account?
- Log in to back office from our website tradeplusonline.com with your username and password. If you have forgotten your password you can log in by generating OTP with your registered mobile number.
- Click on the option “Backoffice” at the menu provided at the left side of the dashboard. You will be directed to a new backoffice dashboard.
- From the menu provided at the left side go to “Finance” and then go to “Client Portfolio Report”. In the pop-up box select “Portfolio Statement” under report type and click view.
The report provides you both realized and unrealized profits with purchase cost for the stocks you hold.
Click here to log in to your backoffice and a have look at your holdings and seize the opportunity.