Tax loss harvesting kya hota hai | Mutual funds capital gains par tax harvesting
Aaj ki video mein hum aapko batayege ki kaise Tax Harvesting se aap apne mutual fund capital gains par tax bacha sakte hai.
Toh iss video ko end tak dekhiye aur janiye ki tax harvesting kaise karte hai aur apne tax bachiye.
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#LTCG #TaxHarvesting #SaveTax
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The strategy that allows you to reduce your tax on long term capital gains
from mutual fund investments is called Tax Harvesting.
So...what is tax gain harvesting?! How can you use it to reduce your long term capital gains tax?
To understand the answers to these, you must know about how long term capital gains are taxed.
In 2018, our government re-introduced the long term capital gains on equities.
The rule meant that any gain made from equity investments, over and above Rs 1 lakh in a financial year is taxable at 10%.
And if you are wondering what are long capital term gains, well it the
returns you make by selling your equity investments held for more than 12
months.
Now If you are a small investor your yearly gains may not cross the 1 lakh limit immediately.
But, when you let your gains run over for a long period of time, it will definitely cross the threshold at some point.
For instance, if you invest Rs. 5,000 per month in equity funds, with 12%
returns per year, it will lead to taxable gains within 5 years. This period will be
just 3 years for if you invest Rs. 15,000 every month
Here, you can see the SIP amount and the capital gains with 12% annualized returns over different periods of time.
Similarly, people who have a large equity portfolio will have higher incremental gains.
Therefore, if you want to pay low or no taxes, you need to ensure these gains
don’t build up beyond the tax-free limit and that’s what Tax Harvesting is all
about.
Tax harvesting is the strategy of selling a part of your mutual fund units to book long term capital gains and reinvest the proceeds in the same mutual fund.
To understand this better, let’s take an example.
Assume you have invested Rs 5,00,000 in an Equity Mutual fund on 15th Feb
2018, and on Feb 19th, 2020, the value of this investment becomes Rs
5,90,000.
Now if you redeem this, your gains will Rs. 90,000 and your tax liability will be zero. That’s because any Equity Investment held for more than
12 months qualify for Long Term Capital gains and the tax has to be paid only if gains exceed the limit 1 lakh in a financial year.
Next, you invest this entire amount i.e. Rs. 5,90,000 soon after redeeming.
Your investment cost will be reset to Rs. 5,90,000 and so will the date of
investment.
Now, say your investment value increases to Rs. 6,50,000 after
another year.
When you redeem, your gains will be Rs. 60,000 - which is still
less than the 1 lakh limit.
Had you not redeemed and reinvested the amount, your long term gains
would have been Rs 1,50,000 (Rs 5,00,000-6,50,000)
and you would have
needed to pay a 10% tax on the amount that exceeded the limit of 1 lakh. So a
tax of 5,000 (10% of 50,000)
You can use this method even when you are investing via SIPs.
You can
redeem units that you have held for more than 12 months and reinvest.
However, if you redeem the units but don’t reinvest, the strategy becomes meaningless.
Similarly, another tax-saving method you can use to save tax is tax-loss harvesting.
In this method, you book losses and offset gains in any other
instrument to bring down your tax liability
Let’s say you have invested Rs. 2 lakh in HDFC Small Cap Fund on 15th
January 2019.
Now, on February 3, your investment value would be 1.84
lakhs.
In this scenario, your long term capital loss in Rs. 15,000
Now if you sell this investment, you are booking the losses (but do remember
to reinvest this money immediately), you can use this to offset any long-term
capital gains you might have received in the year.
If you cannot use your capital loss to reduce your capital gains in one year, you can carry forward the losses for up to 8 assessment years.
For example, 2 years down the line, you sell a long term equity MF investment and make 1.5 lakh in capital gains.
Since you are Rs 50,000 above the limit, you have to pay tax.
However, you can remove this Rs 15,000 from the Rs
1.5 lakh gain for tax calculation.
So your effective LTCG will be Rs 1.5 lakh -
Rs 15,000 = Rs 1,35,000 and you will pay tax only on Rs. 35,000 as against
Rs 50,000 you would have paid otherwise.
This is how tax-loss harvesting acts as a critical strategy to save tax for many investors.
A good way to use tax loss harvesting is using it as a way to remove underperforming funds from the portfolio and not exit from good funds that might have seen a small blip in the short term.
As you can see, if you follow these two strategies of tax harvesting, you can
lower your tax liability and have more returns in your bank account.