You can save up to ₹10,000 in LTCG taxes every financial year with Tax Harvesting!!!
Here is a 🧵 on what Tax Harvesting is and how you can use it to reduce your LTCG liability.
Here is a 🧵 on what Tax Harvesting is and how you can use it to reduce your LTCG liability.
First,we need to understand what LTCG is?
Capital gains earned over and above ₹1 lakh on selling equities, including shares and mutual funds, after one year are called long-term capital gains (LTCGs). These LTCGs are taxed at the rate of 10% .
Capital gains earned over and above ₹1 lakh on selling equities, including shares and mutual funds, after one year are called long-term capital gains (LTCGs). These LTCGs are taxed at the rate of 10% .
Note that the first ₹ 1 Lakh of LTCG is exempt from 10% tax.
Tax Harvesting - how it works?
Tax Harvesting is a technique that utilises the ₹ 1 Lakh annual LTCG exemption by selling and buying back part of your investment such that you realise gains and not pay taxes on the exempt ₹ 1 Lakh of LTCG.
Tax Harvesting is a technique that utilises the ₹ 1 Lakh annual LTCG exemption by selling and buying back part of your investment such that you realise gains and not pay taxes on the exempt ₹ 1 Lakh of LTCG.
This process can be repeated every year to take advantage of the ₹1 lakh exemption in case of LTCG. Through this, one can save tax of up to ₹10,000 every year.
Tax Harvesting with an example:
Assume you have invested ₹ 400,000 in an Equity Mutual fund on 20th Jan 2020, and on Jan 28th, 2021, the value of this investment becomes ₹ 500,000. Now, if you redeem this, your gains will be ₹ 100,000 and your tax liability will be zero.
Assume you have invested ₹ 400,000 in an Equity Mutual fund on 20th Jan 2020, and on Jan 28th, 2021, the value of this investment becomes ₹ 500,000. Now, if you redeem this, your gains will be ₹ 100,000 and your tax liability will be zero.
That's because the first ₹ 1 Lakh of LTCG is exempt from 10% tax.
Next, you invest this entire amount, i.e., ₹ 500,000 soon after redeeming. Your investment cost will be reset to ₹ 500,000.
Next, you invest this entire amount, i.e., ₹ 500,000 soon after redeeming. Your investment cost will be reset to ₹ 500,000.
Now, say your investment value increases to ₹ 600,000 after another year. When you redeem, your gains will be ₹ 1,00,000 – which is still exempt.
Had you not redeemed and reinvested the amount, your long term gains would have been ₹ 200,000 (₹ 600,000-₹ 400,000), and you would have needed to pay 10% tax on the amount that exceeded the limit of Rs. 1 lakh.
So a tax of Rs. 10,000 (10% of 100,000).
So a tax of Rs. 10,000 (10% of 100,000).
Tax Harvesting helps you save it .
Repeat this process and you can save upto ₹ 10000 of your LTCG tax liability every year.
Repeat this process and you can save upto ₹ 10000 of your LTCG tax liability every year.
Note-
•You should consider harvesting once the holding period of your equity/mutual fund (in part or in full) is greater than 12 months.
If the duration is less than 12 months, your investment will incur a short-term capital gain (STCG) of 15 percent.
•You should consider harvesting once the holding period of your equity/mutual fund (in part or in full) is greater than 12 months.
If the duration is less than 12 months, your investment will incur a short-term capital gain (STCG) of 15 percent.
•It is very important to reinvest the amount immediately without wasting any time. At times, people wait too long to reinvest, or reinvest only partially.This can seriously hamper your financial goals.
Also,It is important that one considers the cost involved in tax harvesting.While you save 10% on LTCGs amount, you incur small charges in the form of security transaction tax, stamp duty, brokerage and so on, which are most likely not more than 1% of the amount.
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