Tax planning is an integral part of investment portfolio construction. If you are seeking better post-tax returns, you cannot afford to ignore it.
When building a portfolio, investors typically focus on risk profiling, income versus savings rate, age and asset allocation. These form the foundation of portfolio design. But that is only one part of the exercise. Every investor must also evaluate tax efficiency within the broader investment plan to minimize avoidable tax leakages.
Minimizing tax drag
Several strategies can help, depending on your financial situation and goals.
For instance, tax-loss harvesting allows you to offset capital gains by booking losses where appropriate. Income splitting and gifting to family members—within the legal framework—may help optimise overall tax incidence.
For long-term wealth planning, creating a trust structure can support inter-generational wealth transfer while offering better control and protection of assets. Similarly, instead of redeeming investments and triggering capital gains tax, investors may consider a loan against securities (LAS) to meet liquidity needs.
Each of these strategies works differently and must align with your holding period, asset mix and financial objectives.
Let us examine two specific strategies: tax-loss harvesting and using a loan against securities (LAS) instead of redeeming investments.
Harvesting losses
Tax-loss harvesting tends to work best in volatile markets, particularly when indices correct sharply after a rally—as seen between October 2024 and February 2025. LAS, on the other hand, may be useful in rising markets when short-term liquidity is required, for example to exercise employee stock option plans (ESOPs).
Consider Rajesh, an IT professional in his late 40s with a seven-year-old equity mutual fund portfolio. During the October 2024-March 2025 correction—when the Nifty 50 fell 21%, mid-caps 13% and small-caps about 12%—he decided to restructure his portfolio.
Rajesh had realized gains of ₹5 lakh and short-term losses of ₹3 lakh. By offsetting the losses, his net taxable gain fell to ₹2 lakh, reducing his tax liability to ₹25,000 instead of ₹62,500. The tax saving of ₹37,500 came alongside disciplined portfolio rebalancing.
Investors could adopt a similar approach in such phases—booking losses in select mid- and small-cap holdings and using them to offset realized gains from rebalancing.
Borrow, don’t redeem
Now consider Priya, who needed ₹20 lakh to purchase ESOPs. Her ₹5.23 crore portfolio had been built over 10 years at an 18% XIRR.
Instead of redeeming ₹20 lakh and triggering capital gains tax, she opted for an LAS at 10.25%, with repayment structured over five years.
Assuming a 14% annual return going forward, redeeming would have reduced her compounding base and lowered her five-year portfolio value to about ₹9.67 crore. By using LAS and allowing the full corpus to remain invested, the projected value was higher—around ₹11.09 crore—even after accounting for interest and principal repayment.
The difference arose from the power of compounding on the ₹20 lakh that was not withdrawn.
The broader takeaway is that market phases and liquidity needs should guide tax-aware decisions. Used judiciously, mutual fund portfolios can be managed in a tax-efficient manner without disrupting long-term compounding.
However, tax rules are nuanced and subject to change. Investors should consult a professional before implementing any such strategy.
Dilshad Billimoria is a certified financial planner, managing director, Dilzer Consultants Private Limited