Capital Gains Tax Harvesting is strategy in which the Investor sells the Capital Asset to take the benefit of Tax Exemptions. By following this strategy, a person can easily save upto Rs. 10,000 in each financial year and a lot of financially savvy investors apply this strategy in the month of March so that they can claim this benefit.

The Capital Gain Tax Harvesting strategy is completely legal and a lot of smart investors apply this strategy to take the benefit of the Rs. 1 Lakh tax exemption which is available for Long Term Capital Gains arising from the sale of property.

In the year, 2018 – the Finance Minister Nirmala Sitaraman announced a 10% Capital Gains Tax on sale of shares and mutual funds under Section 112A which are held for more than 1 year. However, this 10% Tax is levied on the gains which are over and above Rs. 1 Lakhs. Thus, on the first 1 lakhs – there is no tax and on the gains above Rs.1 Lakhs – there is a tax of 10%.

To explain with the help of an example, Mr. A makes realized capital gains of Rs. 4 Lakhs in a financial year by selling shares which were originally purchased in 2020, then the first 1 Lakh is exempt and the balance 4 Lakhs is taxable @ 10% which leads to a tax outgo of Rs. 30,000.

How make save Tax through Capital Gain Tax Harvesting?

A smart way of saving taxes is that if a person does not have any Long Term Capital Gains in one year but has gains from shares which he has not sold – then it is advisable to sell these shares in a manner that he makes a gain of Rs. 1 Lakhs from such sale.

And if he is still bullish on that stock – then he can again buy the shares the next day.

By doing this, the person is able to convert his unrealized gains into realized gains and save out on taxes. Thus, in the above example wherein Mr. A was getting a profit of 4 Lakhs and paying Rs. 30,000, a smart strategy would have been if he had disclosed Rs. 1 Lakhs of capital gains every year and thereby claimed exemption and his Tax outgo would have been Nil.

So, Mr. A should have sold his shares every year in a manner that he made a profit of Rs. 1 Lakhs every year and if he was bullish on this stock, then he could have again bought the shares the next day.

Things to note before doing Capital Gain Tax Harvesting

It is recommended that a shareholder makes note of the following before applying the strategy of Tax Loss Harvesting:-

  1. It is recommended that the shareholder does not buy the shares back in his account the same day as then it would be considered a speculative transaction. He should either buy the shares the next day but if he thinks that the price may change by the next day – then he can buy the shares on the name of his family member.
  2. The maximum benefit which can be made by applying this strategy is Rs. 10,000 p.a. However, please note that there would be some brokerage expense incurred as well on buying and selling of these shares.
  3. If a person has brought forward capital losses or any Short Term Capital Gain, then first the losses would be adjusted and then the benefit of the Rs. 1 Lakhs Tax Exemption would be allowed.
  4. It is recommended that this strategy is implemented towards the end of the financial year say in Feb or March as the expected profits of the financial year get clearer by the end of the financial year.
  5. At the time of selling, the gains would be counted on FIFO Basis, i.e. it is assumed that the shares which were purchased first are the ones which are being sold and gains computed accordingly.
  6. This strategy of capital gain harvesting is only applicable on sale of listed Equity Shares and Equity Mutual Funds.

The concept of Capital Gain Harvesting has also been explained by the author in a live TV Show and is shared herewith:-