Pay ZERO tax on stock market income - Tax Harvesting #LLA - YouTube

How is tax saved by the tax harvesting technique?

This is probably the most requested tax-related topic on LLA.

So let's begin. Today we shall discuss this matter.

what is meant by tax harvesting?

How is it done? How is the tax saved from it?

And what all things should we keep in mind.

Friends, my name is Rishabh Jain

and you are watching Labour Law Advisor.

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So, before we move forward,

you must know the basic concepts of tax

like what is capital gain, how is tax calculated in equity and debt?

What is long term and short term capital gain?

How much tax is applicable at it?

And before there used to be no tax on long term capital gain.

We have discussed all these things in our previous video

in which we collaborated with Rachana Madam

If you have not watched that video

and you're not aware of these concepts,

then I would like you to watch that video first and then come back here.

And if you continue to watch this video, I hope your concepts are clear.

So you would know that before 2018,

India did not have any long term capital gain tax on equity

But ever since this rule changed, there was a lot of public protests

So the government decided to do a little bit of a change.

Up to 1 lac every year your capital gain would be exempt.

Over and above Rs 1 lac capital gain, you will have to pay a 10% tax.

So, using this LTCG exemption of upto Rs 1 lac,

that technique is called tax harvesting. Tax harvesting can be done even in case of a loss.

We will discuss that at the end of the video.

So let us now understand how is this tax harvesting done.

Assume you have one share of the ABC Company.

An year ago you had purchased it for Rs 1 lac.

And now the value of that share has become Rs 2 Lac.

Now if you go and check your DEMAT account,

it will show you an unrealized gain of Rs 1 lakh.

The term 'unrealised' is used here because it hasn't been realised yet.

You haven't yet sold the share.

So as of today, yes it has a notional value of Rs 2 lakh.

But maybe tomorrow this value becomes Rs 1,90,000

day after tomorrow, it may become Rs 1,80,000

or it may become even more than that.

So the government says that till you don't sell the share,

your app might show whatever amount of profits or capital gains,

We would not include it for the tax purposes.

On the date you decide to sell it,

whatever profit or capital gain you incur,

that will be added in your tax calculation.

This means that assume you have just this stock in your portfolio

and if you ain't selling it this year,

So your capital gain for this year would be zero.

So how will you use that limit of Rs one lakh? You won't be able to.

If I suggest you to sell it, you may ask why would I sell it now

right now the amount has only doubled and as per my calculation,

within 10 years it would become 10 times.

I will sell my shares at that time.

You may sell it later also, but then you will have to pay a lot of tax.

But the technique that I am going to tell you,

using that you can save a lot of tax.

So take the example of this share only,

You bought this share in the zeroeth year for Rs 1 lakh.

Every year its value went on increasing by Rs one lakh

Meaning, in the first year it became one lakh to two lakh rupees.

then three lakh, four lakh and in the 10th year, its value became Rs 10 lac.

then you sold it in the 10th year for Rs 10 lac,

then what would be your capital gain?

Your selling price is Rs 10 lac minus cost price which is Rs 1 lac,

which means you incurred a long term capital gain of Rs 9 lac.

In the 10th year, the tax on this amount would be 9 lac- 1 lac exemption

that is 10% of Rs 8 lac which amounts to Rs 80,000.

Now if this person did some tax harvesting,

He sold this share in the first year for Rs 2 lac

and immediately bought another share from the market in Rs 2 lac.

So in the first year, he incurred a capital gain of Rs 1 lac,

Similarly, after the second year, he sells this share for Rs 3 lac

just one share that he had, he sells it for Rs 3 lac in the market

And with the Rs 3 lac he received, he again purchased a share in return.

He kept doing this every year, so by the 10th year,

his total capital gain, accumulating by Rs 1 lac each year,

His total capital gain became Rs 9 lac.

But since each year up to Rs 1 Lac capital gain is tax-exempt,

So the total tax on the entire amount became zero.

It means that in any financial year, he did not pay tax at all.

So you must have understood the concept.

Some people might say, his entire compounding got wasted.

In compounding, you have to hold the share for too many years.

So I am telling you about a concept.

Please understand, it is a share and not an apple.

If I sold you an apple for Rs 100

And purchased one apple from you in Rs 100

And if you say that the apple which you sold me was very sweet

and the ones I sold you are very poor in taste.

Such a thing can happen with apples but not in the case of shares.

One share of Reliance is in no way different from its any other share.

So if you sold one share and immediately purchased another

at the same rate, then what is the difference?

Your compounding is going to remain the same.

Compounding means you are holding onto the shares of that company

for a long term. That is called compounding.

It makes no difference that if for your accounting purposes

you sell 100 odd shares and immediately buy them back. As long as

the selling price & the cost price of those 100 shares remain the same.

So this is the main feature of Tax Harvesting.

Meaning the price at which you sell a share,

immediately you bought the share at the same price.

That is the number of shares in your account were maintained.

But in scenario A, your capital is being shown as Rs 1 lac

and capital gain is reflected as Rs 9 lac.

Whereas in scenario B, after the 9th year, your capital is Rs 9 lac

and the gain is reflected as Rs 1 lac.

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So now you would say that now you have understood the theory.

Tell us how is it practically done?

So I am already putting out a disclaimer here.

If you are not an excel wizard

or if your app of mutual funds or stocks lacks in supporting you,

then it is going to be very difficult.

Still, we would try to understand it.

What you need to do is, while we are speaking of stocks,

go to your DEMAT account

and download the transaction history of your stocks.

As long as you are not into too much sale and purchase of stocks,

and you are a long term investor,

You purchase a bulk amount of stocks intending to sell them later

when you get a good return on it, and generally do not sell the shares,

In that case, choose the stocks which you've purchased before 365 days

or before one year.

Check their current prices. And if they are running in profits,

then you can sell those shares and harvest your tax.

While harvesting you have to bear in mind

that you must have enough liquidity in your account

that when you sell that stock,

you should have enough money to buy back the shares immediately.

Because when you sell the stocks,

the money does not get credited to your account on the same day.

T+1 or T+2, one or two days later

the amount gets credited in your account.

In such a case, if you did not have current liquidity,

And after two days, if the share price which is Rs 100 today

becomes Rs 110, you will unnecessarily end up incurring a loss.

Because you sold the shares in Rs 100

And you having to buy them back for Rs 110.

You must never fall into a situation like that.

So the ideal condition is that, assume you have to sell 10 stocks,

Before that place a buy order for 10 shares

after placing the buy order, at the same rate place a sell order

for 10 shares. And when will you do this task?

This task would be done in the market hours

that is between 9.15 AM to 3.30 PM

Later on if you do and place the AMO etc,

You would not know at what price it will open and close.

So you must not take this risk.

Because overall, you are saving 10% of Rs 1 lac which is Rs 10,000.

If you make such minor mistakes then perhaps

you will save Rs 9,000 or Rs 8,000 instead of Rs 10,000

So do this work during the market hours itself.

And the same principle which is being used for stocks,

will be applicable for mutual funds as well.

In stocks, you are getting stocks of individual companies

whereas in mutual funds, you get units.

So you can check these units which you bought a year ago.

And now by selling those units you can harvest your tax.

Now, in this case, one question may arise in your mind.

Assume I had purchased 100 shares of Reliance in January

Then again I purchased 100 shares in February.

Then I again purchased 100 shares in the month of March.

Now, assume if I decide to sell 150 shares in April,

which of my 150 shares would be sold?

Here the FIFO rule applies. Which means First In First Out.

The shares that you purchased first will be sold first.

If you decide to sell 150 shares in the month of April,

Then the 100 shares of January month will be sold first.

then the next 50 shares will be from the February month.

Since the shares of the January month came in first.

So they would go out first.

So as per your share price in the January month

your capital gain would be calculated for the first 100 shares.

And for the remaining 50 shares, as per the February pricing

the capital gain would be calculated.

Further, assume you want to sell 80 more shares in May.

Then, in that case, the remaining 50 shares of February month

and 30 shares from the March month will be sold out.

And accordingly, your capital gain will be calculated.

So remember the rule, First In First Out.

The same rule applies to the mutual funds' units as well.

The units that you have purchased before

and if today you are planning to redeem,

then the initial units will be sold out first.

and then the units that were purchased later.

And as per its pricing, your mutual fund capital gain will be calculated.

So I hope till now the concept is clear to all of you.

Please understand that even though

I am using the examples of stocks and mutual funds,

this tax limit of Rs 1 lac is the overall limit on the equity funds.

Whether you apply it for stocks or stock mutual funds,

the limit is Rs 1 lac for both stocks and mutual funds combined.

It is not that you show a mutual fund LTCG of Rs 1 lac.

and for stocks also you make an LTCG upto Rs 1 lac.

So after looking at the transaction history, we did this much calculation.

as per the current liquidity that we have.

After this, go to your mutual fund and stocks app

and check what is the capital gain in your account.

And assume if your capital gain is showing around Rs 60,000-70,000,

you still have Rs 30,000 to be used.

You may look for more opportunities in the coming months.

when you can use the remaining capital gain amount too.

If the capital gain amount is anywhere around Rs 1 lac or 1.25 lacs,

then you have to stop for a while now.

Then you don't have to sell it for the harvesting purpose.

One more question will arise in your mind.

Should I do this harvesting in the month of March only?

When our financial year is drawing to a close,

or can you do it in between the year also?

So, my recommendation is that

you should do a little bit in between the year also.

There are two reasons for it.

First, you may or may not have enough liquidity in the March month.

So assume currently it is the October month.

In this month, I have a liquidity of Rs 20,000.

So accordingly I harvested the stocks.

Then harvested a little bit in the November and December month.

And the little harvesting amounts kept on getting added.

By the time of March if you suddenly require Rs 2 lac or Rs 3 lac,

And if you do not have that much money at that time,

Then, in that case, you will not be able to do the tax harvesting.

The second reason is if you waited till March

and if the share prices fall down,

and this time the desired capital gain that you need to have,

you do not have that much capital gain in your account,

then you would not be able to use it.

Some people might even ask, that if I harvest in the October month

and after that, if the share prices further increase, then?

I could have received more capital gains like that.

But I sold it for less.

Yes, that may happen and it is kind of a risk,

But an even bigger risk would be if you sell the shares in October

and then if the prices fall down? In that case,

the capital gains that you were getting in October,

you wouldn't even get that much.

So, it would be a little calculative to be precise.

So, again I would say if every month if you use up your capital gains

If you keep harvesting bit by bit,

then by the end of the year, you will be in a comfortable position.

I know it sounds a little complicated

because it is a little complicated.

Yes, there is actually an App that automates this whole process.

But since this is not a paid video, I am not saying the name of that App

But, I would share the details in the description box.

Through that App, very intelligently,

your mutual fund tax harvesting process goes on smoothly,

It automatically recommends you,

in case you have any mutual funds to harvest

Just on the press of a button, immediately the units would be sold.

And immediately you can purchase also at the same price.

And everything happens in an automated manner.

Exit load and everything else is taken care of.

Suppose even if you don't have this feature on your App,

how would you know after this transaction that

how much of your capital gain has been harvested.

You would go to the Capital Gain report of your App.

And check for the current financial year, how much is your LTCG,

Suppose you sold for Rs 50,000

and it is showing you a capital gain of Rs 8,000,

that means you have remaining Rs 92,000 to still be harvested.

Now, I am clearly stating the last point here,

And that is EXIT LOAD.

Now, what is Exit Load?

Many of the mutual fund companies, avoid the selling

of their mutual funds specially in a short duration.

And hence they apply an exit load on its sales.

Assume you plan to sell a mutual fund before one year,

then you will be charged with 1% of Exit Load.

Meaning whatever amount you get from its sales,

the mutual fund company will deduct 1% of it as exit load.

So, I personally choose to invest in those mutual funds

in which after 365 days there is no exit load as such.

Or after one year there is no exit load on its sales.

But in some good mutual funds,

there is exit load upto 2 years or even 3 years.

In some mutual funds, there is always an exit load attached.

So please pay attention to this fact.

It must not happen that while doing tax harvesting,

you get charged with an exit load.

In 99% of the cases, generally after one year,

the equity mutual funds don't have an exit load.

But in a few mutual funds, it is applicable.

And in case you have invested in such mutual funds,

then be cautious while tax harvesting in such cases.

If your app is not automatically filtering out those mutual funds.

Now comes the bonus tip.

And that is, Tax Loss Harvesting.

You will say, till now we were talking about just gains,

from where did this loss come?

Let me explain this with an example.

Suppose in any financial year, you get a capital gain of Rs 5 lac.

Which means you will have to pay a 10% tax on it.

But you have certain scripts or stocks,

in which you have an incurred an unrealised loss of around Rs 3 lac

And you want to hold these stocks for a long term,

And you also do not want to pay this much taxes on them.

Then what do people do is,

Somewhere around the month of March, they sell these stocks,

and immediately purchase them back at the same price.

But in their account, that unrealised loss of Rs 3 lac

it now becomes a 'realised loss'.

Now what they can do is, with their Rs 5 lac of capital gain,

they can offset it with a loss of Rs 3 lac

And so their net capital gain would become Rs 2 lac.

And within that also if they use their Rs 1 lac limit,

then they would have to pay the tax on just Rs 1 lac.

And this is called the Tax Loss Harvesting.

You will have to bear one thing in mind here.

You can offset a long term capital loss against long term capital gain,

But a short term capital loss can be offset against both

either short term or long term capital gain.

You can offset it against any of the two.

And ultimately the tax that you need to pay,

that will be paid on the difference amount.

That is on the net capital gain that you have incurred.

Another interesting point to note here,

this long term or short term capital loss here,

isn't necessary to be booked against equity only.

You can book equity and debt against equity or debt against equity,

or equity against debt, you may do anything like that.

And accordingly you may optimize your tax

.Because the taxation slab for equity is different

and the taxation slab for the debts is different.

Again, we have given all that information in our previous video.

You must watch it.

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