Here are 2 ways to save taxes on capital gains1 min read . Updated: 13 Oct 2021, 08:33 PM IST
- Redeem and reinvest, tax loss harvesting are two popular ways to reduce taxes on capital gains
Listen to this article
Long-term capital gains over ₹1 lakh are taxed at 10% after a holding period of 1 year. However, the tax amount can be reduced further by following a few smart steps.
And one of the most popular way of doing it redeem and reinvest. Here is how it works:
For example, suppose an investor made ₹4.9 lakh from a mutual fund investment of ₹4 lakh. The investor has to redeem and re-invest the entire amount. The following year, the total corpus becomes ₹5.6 lakh, i.e. gains worth ₹70,000. Now, in case, you would not have redeemed and reinvested, the capital gains would be ₹1.6 lakh, of this ₹60,000 would be taxable.
However, it is extremely essential to reinvest the money immediately. Otherwise, if the money lies idle in the bank, it will get spent or invested unfavourably, that way the strategy loses its purpose.
Another way of doing it by tax loss harvesting. Here is how it works:
Tax loss harvesting is a way to reduce tax on capital gains through set-off against capital losses. In other words, one is using the capital loss that you may have to adjust against the capital gains, says Amit Trivedi, personal finance coach and author of Riding the Roller Coaster.
Further explaining how the method works, he says, “Let us say that in a year, one incurred capital gains worth Rs. 2,50,000 in equity mutual funds. Assuming that there is no other capital gain, the taxable capital gains would be Rs. 1,50,000 as the first Rs. 1,00,000 of capital gains in a year is tax-exempt."
At the same time, if one has capital loss worth Rs. 1,20,000 in the same year; this loss would be adjusted against the taxable capital gains of Rs. 1,50,000. Thus one arrives at net capital gains worth Rs. 30,000 (Rs. 1,50,000 - Rs. 1,20,000). The tax would be payable on these net gains only, he adds.
Also, the losses booked in one year could be carried forward for 8 years to reduce tax on capital gains even in subsequent years.
That is, suppose you incurred a capital loss of ₹40,000 in 2018, and booked capital gains worth ₹1.8 lakh in 2020. While calculating the taxes for 2020, you can remove ₹40,000 from ₹1.8 lakh and that way the amount taxable would be ₹40,000.
Never miss a story! Stay connected and informed with Mint. Download our App Now!!