Savvy investors can turn market downturns into tax advantages through loss harvesting in a bear market. Tax loss harvesting is a tactic smart investors use to profit from market declines. This technique enables individuals to sell underperforming stocks during a down market, resulting in losses that can be used to offset capital gains and, ultimately, lower their total tax obligation.
Selling investments that have lost value to realize a loss is known as "tax loss harvesting." Using these capital losses to offset capital gains from other assets, the investor's taxable income for the year can be decreased.
Vibhavangal Anukulakara Private Limited's founder and managing director, Siddharth Maurya, notes that while long-term gains over ₹1 lakh are taxed at 10% and short-term capital gains are taxed at 15%, tax loss harvesting might result in significant savings by offsetting those gains with realized losses.
The secret to tax loss harvesting is finding lost-value stocks and selling them before the fiscal year ends. By offsetting other capital gains, this realized loss can lower taxable income.
While long-term capital losses in India can only be deducted from long-term gains, short-term capital losses can be deducted from both short-term and long-term gains.
"The wash sale rule, which prohibits the tax benefit from being claimed if the investor buys the same or nearly identical security again within 30 days before or following the sale, should cause investors to exercise caution. By selling and promptly repurchasing the same investment, taxpayers are prevented from inflicting fictitious losses and preserving their market position without actually suffering a loss," said Siddharth Maurya
However, tax loss harvesting does not require changing your investment approach. Investors can reinvest in comparable but distinct assets to preserve their preferred asset allocation and take advantage of the tax advantages. This strategy allows investors to lower their tax burden while updating their portfolios and possibly enhancing long-term performance.
CA Sandeep Agrawal suggests that people who want to reduce their tax obligation sell underperforming investments to offset capital gains. Additionally, he suggests investing in growth mutual fund alternatives, which let you postpone paying long-term capital gains tax (LTCG) until the assets are eventually sold, rather than receiving dividends, which are subject to annual taxes.
Investors are advised to speak with a tax expert or financial planner to understand further how tax loss harvesting may affect their particular circumstances and ensure compliance with Indian tax regulations. Keeping abreast of new legislation is crucial because tax laws are subject to change.
The CEO and co-founder of Tax2win, Abhishek Soni, says there are a few essential things to remember:
Soni says that "tax loss harvesting should not be used as an investment strategy." "It's not for investing decisions; it's a tool for tax savings."
"Tax loss harvesting enables investors to optimize their taxes and rebalance their portfolios, making it a powerful strategy to reduce tax liability in volatile market conditions," highlights Shefali Mundra, ClearTax's Tax Expert.
Meanwhile, the benchmark indices, the Sensex and Nifty, entered a corrective mode after smashing numerous record peaks this year. The NSE main gauge fell more than 10% from its September record high. But starting in October, the markets were attacked by bears. The Nifty has dropped 2,744.65 points, or 10.44%, from its record high, and the BSE benchmark gauge has dropped a staggering 8,397.94 points, or 9.76%, from its peak.
Read all our personal finance stories here
Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
