What is Tax Harvesting | What is Tax Loss Harvesting | Tax Harvesting in Mutual Funds - YouTube

Tax harvesting - A way to save tax on your capital gains!

None of us enjoys paying taxes.

Yet we need to pay tax on our income, GST on things we purchase and since 2018 on the

gains we make from our investments in Mutual Funds.

In this video, we will tell you how you can reduce and even make taxes on long term capital

gains from mutual funds zero.

But… before that… don’t forget to click the subscribe button and hit the notification

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Let’s begin.

The strategy that allows you to reduce your tax on long term capital gains

from mutual fund investments is called Tax Harvesting.

So...what is tax gain harvesting?!

How can you use it to reduce your long term capital gains tax?

To understand the answers to these, you must know about how long term capital gains are taxed.

In 2018, our government re-introduced the long term capital gains on equities.

The rule meant that any gain made from equity investments, over and above Rs 1 lakh

in a financial year is taxable at 10%. And if you are wondering what are long capital term gains, well they are

the returns you make by selling your equity investments held for more than 12 months.

Now If you are a small investor your yearly gains may not cross the 1 lakh limit immediately.

But, when you let your gains run over for a long period of time, it will definitely

cross the threshold at some point.

For instance, if you invest Rs. 5,000 per month in equity funds, with 12%

returns per year, it will lead to taxable gains within 5 years.

This period will be just 3 years for if you invest Rs.15,000 every month

Here, you can see the SIP amount and the capital

gains with 12% annualized returns over different periods of time.

Similarly, people who have a large equity the portfolio will have higher incremental gains.

Therefore, if you want to pay low or no taxes, you need to ensure these gains

don’t build up beyond the tax-free limit and that’s what Tax Harvesting is all about.

Tax harvesting is the strategy of selling a part of your mutual fund units to book long

term capital gains and reinvest the proceeds in the same mutual Fund. To understand this better, let’s take an

example. Assume you have invested Rs 5,00,000 in an Equity Mutual fund on 15th Feb

2018, and on Feb 20th, 2020, the value of this investment becomes Rs 5,90,000.

Now if you redeem this, your gains will Rs. 90,000 and your tax liability will be zero.

That’s because any Equity Investment held for more than 12 months qualify for Long Term Capital gains and

the tax has to be paid only if gains exceed the limit 1 lakh in a financial year.

Next, you invest this entire amount i.e. Rs. 5,90,000 soon after redeeming.

Your investment cost will be reset to Rs. 5,90,000 and so will the date of investment.

Now, say your investment value increases to Rs. 6,50,000 after another year.

When you redeem, your gains will be Rs. 60,000- which is still less than the 1 lakh limit.

Had you not redeemed and reinvested the amount, your long term gains

would have been Rs 1,50,000 (Rs 5,00,000-6,50,000) and you would have

needed to pay a 10% tax on the amount that exceeded the limit of 1 lakh.

So a tax of 5,000 (10% of 50,000) You can use this method even when you are investing via SIPs.

You can redeem units that you have held for more than 12 months and reinvest.

However, if you redeem the units but don’t reinvest, the strategy becomes meaningless.

Similarly, another tax-saving method you can use to save tax is tax-loss harvesting.

In this method, you book losses and offset gains in any other

instrument to bring down your tax liability Let’s say you have invested Rs. 2 lakh in

HDFC Small Cap Fund on 15th January 2019.

Now, on February 3,2020, your investment value would be 1.84 lakhs.

In this scenario, your long term capital loss in Rs. 15,000

Now if you sell this investment, you are booking the losses (but do remember

to reinvest this money immediately), you canuse this to offset any long-term

capital gains you might have received in the year.

If you cannot use your capital loss to reduce your capital gains in one year, you can carry

forward the losses for up to 8 assessment years.

For example, 2 years down the line, you sell a long term equity MF investment and make 1.5 lakh in capital gains.

Since you are Rs 50,000 above the limit, you have to pay tax.

However, you can remove this Rs 15,000 from the Rs 1.5 lakh gain for tax calculation.

So your effective LTCG will be Rs 1.5 lakh- Rs 15,000 = Rs 1,35,000 and you will pay taxonly on Rs. 35,000 as

against Rs 50,000 you would have paid otherwise.

This is how tax-loss harvesting acts as a critical strategy to save tax for many investors.

A good way to use tax loss harvesting is using it as a way to remove underperforming funds

from the portfolio and not exit from good funds that might have seen a small blip in the short term.

As you can see, if you follow these two strategies of tax harvesting, you can

lower your tax liability and have more returns in your bank account.

And with this we come to the end of our video.

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