Home/ Money / Personal Finance/  How to reduce income tax by loss harvesting in weak stock market — explained

Income tax calculator: After bloodbath on Friday session, the Indian stock market has been under sell-off pressure for the last six sessions. But, this weakness in equity market can be turned into a big opportunity by investors who pays income tax. They can reduce their income tax outgo through loss harvesting. 

According to tax and investment experts, if an income taxpayer has managed substantial gains in this financial year, he or she can book losses in their stock holdings that are quoting below their average buying price and set off the capital loss against the capital gains while filing their income tax return (ITR) for the financial year 2022-23. 

Tax and investment experts went on to add that tax loss harvesting would help the investor reduce the risk of further losses in a weak market as well. They advised income taxpayers to take a fresh position in the counter after further dip in the stock and hold it for long term. However, they advised taxpayers to avoid timing the market after booking the loss in their stock positions.

Speaking on how one can reduce income tax by loss harvesting in a weak stock market, Aarti Raote, Partner at Deloitte India said, "The income-tax provisions permit an individual to set off capital loss against the capital gains of the fiscal year. Thus a taxpayer who has made substantial capital gains during the year could sell stocks from his portfolio where the stock prices are falling sharply and are expected to fall further. The loss suffered on such stocks can be offset against the gains made on other trades. This not only helps the taxpayer to reduce the tax outflow but also eliminates the possibility of further losses on declining stock prices and balance risk on his portfolio. While using this option, one should, however, remember that short-term losses can be set off against short-term and long-term gains but long-term losses can only be set off against long-term gains. So selling the right kind of stock holdings is important here."

Tax loss harvesting rules

Explaining tax loss harvesting rules for income taxpayers, Vinit Khandare, CEO & Founder at MyFundBazaar said, "Investing in equity funds, an investor is known to make capital gains - taxable based on how long one stays invested in the particular fund. However, in tax-loss harvesting, the investor sells their stocks/fund units at a loss to reduce their tax liability on capital gains - a lucrative method to offset the capital gains made on equity against the capital loss suffered to pay a lesser amount of tax. Additionally, a few factors need to be kept in mind in tax-loss harvesting - a long-term capital loss can be set off only against only long-term capital gains."

MyFundBazaar expert said that the investor cannot set off long-term capital losses against short-term capital gains. Whereas short-term capital losses can be set off against either short-term capital gains or long-term capital gains - a method to offset the capital gains made on equity against the capital loss suffered to pay a lesser amount of tax.

Don't try to time the market

On caution that one should follow during loss harvesting, Rahul Agarwal, a certified financial planner said, "While tax loss harvesting, one should not try to time the market. Trying to do this may lead to wastage of the whole exercise. He advised taxpayers to book losses in their portfolio stocks that are bleeding and take a fresh position in the stock after further fall that offsets their brokerage and taxes being paid while doing plus and minus from the existing position."

Sectors where loss harvesting can be applied

Speaking on the sectoral stocks where a taxpayer can try loss harvesting, Manoj Dalmia, Founder & Director at Proficient Equities said, "Amid weak stock market, taxpayers looking forward to losing harvesting may book losses in their portfolio stocks in metal, large-cap IT and oil and gas sector."

Disclaimer: The views and recommendations made above are those of individual analysts, experts, or broking companies, and not of Mint.

Asit Manohar
Chief Content Producer at Live Mint Digital Team
Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
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Updated: 29 Sep 2022, 12:26 PM IST
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