Tax harvesting is a smart way to reduce the taxes you pay on your mutual fund returns. By using your losses from poorly performing funds to offset gains from profitable ones, you can lower your overall tax bill. In 2024, this strategy can help you keep more of your earnings.

In this blog, we’ll explain tax harvesting in simple terms and show how you can use it effectively for your mutual fund portfolio.

What Is Tax Harvesting for Mutual Funds?

Tax harvesting involves selling mutual funds at a loss to balance out the gains you’ve made from other investments. This helps reduce the amount of tax you owe.

For example, if you’ve earned profits on some funds, you can sell underperforming funds to create a loss. This loss offsets your profit, meaning you pay less tax overall.

Another method is to sell funds to book profits up to ₹1 lakh, which are tax-free in India. After that, you can buy back the same or similar funds to keep your investment intact.

Common Tax Harvesting Strategies:

• Sell Underperforming Mutual Funds: If you have mutual funds that aren’t doing well, selling them can create losses. These losses can offset your gains from other investments, reducing your taxable income. Many investors use this strategy at the end of the financial year to minimize their taxes.
• Switch Between Mutual Fund Schemes: You can switch from one mutual fund to another within the same fund house. This allows you to realize losses while staying invested. For example, you can move from a poorly performing scheme to a better one while still using the loss to offset gains.
• Use the Wash Sale Strategy: In this strategy, you sell a mutual fund at a loss and then repurchase it after a short period. This way, you get the tax benefit of the loss while keeping your investment position intact. However, use this carefully to avoid scrutiny from tax authorities.

Tax Laws in India for Tax Harvesting:

Here are the key sections of the Income Tax Act that apply to tax harvesting:

Section 112A – Long-Term Capital Gains (LTCG)

• Gains over ₹1 lakh on equity funds held for more than a year are taxed at 10%.
• Securities Transaction Tax (STT) must be paid during both purchase and sale.

Section 111A – Short-Term Capital Gains (STCG)

• Gains from equity funds held for 12 months or less are taxed at 15% if STT was paid.
• For debt funds, gains are taxed based on your income tax slab, regardless of how long you held them.

Section 70 – Setting Off Losses

• Short-term losses can offset both short-term and long-term gains.
• Long-term losses can only offset long-term gains.

Section 73-74 – Carry Forward Losses

You can carry forward losses for up to 8 years to offset future capital gains, giving you more time to use these tax benefits.

How to Apply Tax Harvesting?

Here are some practical steps to make tax harvesting work for you:

• Review Your Portfolio Regularly: Check your mutual fund investments periodically to find underperforming funds you can sell.
• Plan Strategically: Use tax harvesting towards the end of the financial year to maximize its benefits.
• Know the Rules: Understand the tax laws to ensure you’re following them correctly.
• Seek Professional Advice: A financial advisor can help you apply these strategies in a way that suits your financial goals.

Conclusion:

Tax harvesting is a great way to manage your taxes and improve your mutual fund returns. By carefully planning and using tax rules to your advantage, you can lower your tax burden and keep more of your profits.

However, it’s essential to follow the laws and use this strategy responsibly to avoid penalties. With the right approach, tax harvesting can become a valuable tool in your investment journey.

Disclaimer:

This blog is for educational purposes only and reflects the author’s personal views. It does not provide specific product recommendations. Always consult a financial expert for tailored advice.