Have you made profits on selling shares or mutual funds and now wondering how much tax you have to pay? You can save tax payable on those profits in the right way!

First of all what is Capital Gains all about?

Any profit made on selling any capital asset is called Capital Gains. So, if you are trading or investing in stock market or in mutual funds, and have made some profit selling it during the Financial Year (FY), then it is called capital gains, which are taxable based on the holding period.

Capital Gains = Sale Value – Purchase Value – Transfer Expenses (Brokerage, etc.)

How is it taxed?

Capital Gains are classified into 2 types:-

(i) Long Term, or (ii) Short Term

based on the period of holding of capital asset.

I.e. if holding period is more than 12 months, they are called long term capital gains or LTCG for short, which are taxed @ 10% on gains above Rs. 1 lakhs. For holding period less than 12 months, they are called Short Term Capital Gains or STCG, which are taxed @15% flat.

Note: Capital Gains are taxed only on realised profits (i.e. only if you have sold the capital asset)

So, How to save tax? – Here’s the main point! 🙂

If you have realised profits on which you have to pay capital gains tax, you can save tax by booking losses, if any, from your portfolio before 31^st March by selling such Shares/MFs. Your losses will be set off against capital gains and in this way you can reduce your taxes for the financial year.

This is called Tax Loss Harvesting.

Even if there is no gain, you can book loss and carry forward the loss to the next year, which can be adjusted with the gains made in that year.

Note: To carry forward losses, you have to file your income tax return pertaining to the year of loss before the due date. Losses can be carried forwarded upto 8 years.

Take for an example:

You bought 1000 shares of A Ltd. at Rs. 1000 per share in April 2021, sold them in Feb 2022 at Rs. 1250, booking Rs. 2,50,000 as profit. Tax payable @15% Rs. 37,500. Suppose you are also holding 100 shares of B Ltd. at a loss of Rs. 300 per share, then you can sell them before 31^st March to adjust the profit made, thereby saving Rs. 4,500/- in taxes. You can buy the same stocks after 31^st March if you wish to continue holding the same.

This is perfectly legal!

One More Important Point: – What about the Compounding Effect?

For investors compounding effect is the most important. So, if you are an investor, you can book losses to the extent of profit booked during the FY, and buy the same script back after 2 days (settlement period). Your compounding effect will not be disturbed if you buy back the same amount of shares immediately after 2 days.

Note: Choose stocks based on the holding period of stocks sold.

Conclusion:

So hurry up if you have made good profit and have some holdings in losses, you can save your net tax outgo if you book those losses before 31^st March. Remember to buy them back after 2 days to keep intact the compounding effect.

Coming Up >> How to Harvest Your Profits from Investment to Save Taxes!