What is Tax Harvesting?

What is Tax Harvesting?

Last updated: 02 Dec, 2021 | 08:42 am

What is Tax Harvesting?

Long-term gains from equity funds are taxed at 10%. Tax Harvesting is a technique that reduces this impact. It utilises the ₹1 Lakh annual LTCG exemption by selling and buying back part of your investment such that you “realise” gains every year without affecting your portfolio.

Tax Harvesting with an example:

Assume you have invested Rs. 5,00,000 in an Equity Mutual fund on 15th Jan 2020, and on Jan 19th, 2021, the value of this investment becomes Rs. 5,90,000. Now, if you redeem this, your gains will be Rs. 90,000, and your tax liability will be zero. That's because any Equity Investment held for more than 12 months qualifies for Long Term Capital Gains, and the tax has to be paid only if gains exceed the limit of Rs.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, along with the date of investment. Now, say your investment value increases to Rs. 6,90,000 after another year. When you redeem, your gains will be Rs. 1,00,000 – which is still less than the Rs. 1 lakh limit. Had you not redeemed and reinvested the amount, your long term gains would have been  Rs. 1,90,000 (Rs.5,00,000-Rs. 6,90,000), and you would have needed to pay 10% tax on the amount that exceeded the limit of Rs. 1 lakh. So a tax of Rs. 9,000 (10% of 90,000).

How does it work?

1.We will send you an advisory at the right time. Right time is:-

a. When the equity market is performing really well.

b. Or in the middle of every quarter to distribute risk evenly.

2.We suggest the funds you need to redeem and buy back. And with just one click you can sell and buy back the suggested funds.

3.Hurray!! it’s done, you have saved money by taking this action.


Why can't this be done once in March every year just before the financial year ends?

Suppose the market is down in the month of March, then you will be booking less profits than if you would have realized it earlier when the market was up. Therefore using AI we nudge you at the right time(when the market is very bullish) to book profits to benefit both from tax exemption and take advantage of the bull market.

How can I execute on the same day if it takes time for the money from sell action to credit in the bank account?

With a single click on 'Harvest Now' we place sell order for all the suggested funds and will redirect you to the buy order page where with a single click on 'Buy' you will be able to place buy order on all the funds at once. We recommend you to have enough balance in your bank account to place a buy order if not then the order might get cancelled.

I have a few funds with considerable profits, but Tax Harvesting never recommends harvesting tax in them?

Even if you have funds with considerable Long Term Capital Gains, there could be reasons why we don’t show them for Tax Harvesting. Chief among those reasons are –

  • The fund is still under lockin. This is particularly true for ELSS and other speciality schemes.
  • The fund house does not allow lumpsum purchase in the fund. For efficient tax harvesting, you have to be able to buy back the scheme at the same NAV.