We wrote about loss harvesting in our premium post by Bond Baba: Harvest those Losses!

The essence is this:

  • You may have booked capital gains taxes in your accounts by either selling debt funds, selling a property or even in stocks.
  • This gain is taxable, and you’ll have to pay a different amount of tax based on what kind of gain
  • Short term gain in debt funds is added to income and taxed at your highest tax rate (if you make more than 10 lakh a year, it’s 31.2%, for more than 50 lakh, a further 10% more, etc.)
  • Other types of gains are taxed differently – long term in debt or property is 20% after indexation, short term in equity is 15%, long term in equity is 10%, etc. Even gains when selling shares in unlisted companies is taxable like debt.

Now, you have a window to offset those gains, within the next hour or so.

Sell Loss Making Shares and Buy Them Back

You might be holding shares in which you have losses (unbooked) that you intend to hold for longer. If you do, they can be used to reduce your capital gains in total.

The idea is:

  • Consider a share that has unbooked losses: you might have bought say 1000 quantity of Gruh Finance at 400 a few months back, but you intend to hold.
  • Current price is Rs. 270, so you have unbooked losses of Rs. 130 per share
  • You could sell the shares on the NSE, and immediately buy them back on the BSE at roughly the same price.
  • You would have booked Rs. 130 per share in losses, but your new buy price is Rs. 270.
  • That’s Rs. 130,000 of loss
  • Offset that against say a liquid fund redemption gain of Rs. 130,000 which would otherwise attract tax of Rs. 40,000.
  • You’ve just saved the Rs. 40,000 tax this year!

Costs

You’ll pay brokerage and taxes. STT alone will add to about 0.2% for this transaction, and other costs might bump it up to 0.4% or so.

For the above example you might end up paying Rs. 1000 to do this transaction.

However, you save Rs. 40,000 so it’s still worthwhile.

Even if Gruh goes back to Rs. 400 and you sell, your tax will be 10% of the difference (Rs. 130) – so your tax is Rs. 13,000. However remember that you can offset those gains then, with a different stock that you might have that is loss making.

This can be done in India if your tax is less than Rs. 4 crores per year. (Above that, GAAR applies. If you don’t know what GAAR is, you’re probably not paying 4 cr. of tax per year, so ditch)

This process works best if you have short term gains in Debt or property or shares, which are taxed at a high rate. If you have other long term gains in equity, it’s not useful to do this exercise.

What else?

Is this tax evasion? No, it’s a legal way to avoid paying taxes. Remember, avoidance is legal. Evasion is illegal. You can create any structure that saves you tax legally.

You should however not do it if you are a US resident, or citizen or green card holder. Wash sale rules apply there and this is considered evasion in the US. (India has no such rules, thankfully)

You should do this now. You have to do it by 3:30 today. We’ve posted a note in the Capitalmind Slack Channel, but we thought we will follow it up with a note as well.

For the next financial year, we’ll send a comprehensive understanding of the taxation system for Capital gains, so you have the whole year to set up your tax saving plans.

Now, tell them about it: