With the financial year 2025 coming to an end soon, investors and taxpayers are looking for ways to minimize their tax liability. One of the most effective methods to save tax on equity investments is tax loss harvesting. This strategy allows you to reduce capital gains tax legally by adjusting profits with losses. Here’s how you can use this method and other strategies to maximize your savings before the financial year ends.
What is Tax Loss Harvesting?
Tax loss harvesting is a technique where investors sell loss-making stocks to offset capital gains from profitable investments. This helps in reducing taxable income and lowering overall tax liability.
For example:
If you have made a profit of ₹1 lakh from one stock and suffered a loss of ₹50,000 from another, you can adjust the loss against the gain. This will bring your net taxable gain to ₹50,000, thus reducing the tax burden.
Understanding Capital Gains Tax Rules
Short-Term vs. Long-Term Capital Gains
The tax rate on equity investments depends on the duration for which you hold the assets:
Short-Term Capital Gains (STCG): If you sell stocks within 12 months, the gain is taxed at 20%.
Long-Term Capital Gains (LTCG): If you hold stocks for more than 12 months, the first ₹1.25 lakh of profit is tax-free, and any amount above this is taxed at 12.5%.
Short-term losses can be adjusted with both short-term and long-term gains.
Long-term losses can be adjusted only with long-term gains.
2. Sell Loss-Making Investments
Identify stocks that are in loss and consider selling them to offset profits from winning investments.
3. Reinvest After Booking Loss
If you believe in the stock’s future growth, you can buy it again after selling it for loss booking purposes.
Example:
If you bought 100 shares at ₹5,000 per share and their price dropped to ₹4,000, you have a loss of ₹1 lakh. If you also booked a profit of ₹1 lakh from another stock, you can use this loss to save ₹20,000 tax on short-term capital gains.
Important Tax-Saving Actions Before 31st March
1. Review Your Portfolio
Identify stocks that are in profit and loss.
Sell loss-making stocks to offset taxable gains.
2. Book Long-Term Capital Gains Up to ₹1.25 Lakh
Take advantage of the tax-free LTCG limit.
3. Carry Forward Losses for Future Use
Unused losses can be carried forward for 8 years to offset future profits.
Precautions to Take While Applying Tax Harvesting
1. Follow the First In, First Out (FIFO) Rule
When selling stocks, the ones bought first are considered as sold first.
Check the holding period before selling to avoid unnecessary tax liability.
Companies distribute dividends from after-tax profits, making them tax-free in investors’ hands.
3. Opt for Indexation Benefit on Debt Funds
If investing in debt mutual funds, indexation helps in reducing taxable gains.
4. Hold Stocks for Over One Year
Long-term holdings help investors benefit from the ₹1.25 lakh tax exemption.
Final Words
By using smart strategies like tax loss harvesting, capital gain exemption, and ELSS investments, you can legally reduce your tax burden. Make sure to act before 31st March to maximize your savings for FY 2025.
Shalini Bhardwaj is a seasoned content writer with over a decade of experience in the finance sector, specializing in insurance, taxation, and investment strategies. With a strong academic background in finance and a passion for simplifying complex financial concepts, Shalini has crafted engaging articles, guides, and reports for various publications and corporate clients. Her work is dedicated to empowering readers with the knowledge they need to make informed financial decisions.
