What is Tax Loss Harvesting (TLH)?
Tax Loss Harvesting is the process of booking unrealized losses on your stocks or mutual funds. It helps reduce taxable gains and lower the tax you need to pay.
Set-Off Rules
- Long-Term Capital Loss (LTCL):
- Can be set off only against long-term capital gains (LTCG).
- Cannot be set off against short-term capital gains (STCG).
- Short-Term Capital Loss (STCL):
- Can be set off against either STCG or LTCG.
Carry Forward Losses
If you’re unable to set off losses completely during the same financial year:
- Both STCL and LTCL can be carried forward for up to 8 assessment years.
Tax Rates
- Short-Term Capital Gains (STCG):
- Taxed at 15% of the gain until July 22, 2024.
- Taxed at 20% of the gain after July 22, 2024.
- Long-Term Capital Gains (LTCG):
- Tax-free for amounts up to ₹1.25 lakh annually.
- Gains above ₹1.25 lakh:
- Taxed at 10% until July 22, 2024.
- Taxed at 12.5% after July 22, 2024.
Execution Guidelines
- Timing:
- Sell your holdings between 3:15-3:30 PM.
- Buy them back between 9:15-9:30 AM the next day.
- Avoid High Volatility:
- Avoid TLH during volatile weeks to prevent losses from sudden price changes.
- Purpose:
- TLH is only for reducing taxes—not for making trading profits.
- FIFO Rule:
- When selling partially, the First In, First Out (FIFO) method calculates the realized loss.
- Note that realized losses might differ from the overall losses shown in your holdings.
- Check your broker’s detailed breakdown reports for accuracy.
