As the financial year draws to a close, experts suggest it's an optimal time to review portfolios and implement tax-loss harvesting strategies. According to reports from Upstox, tax loss harvesting (TLH) is the practice of selling investments at a loss to offset gains elsewhere in your portfolio, reducing taxable capital gains in the current year. After selling at a loss, investors can buy back similar assets to maintain market exposure while lowering their taxable income and overall tax burden. The strategy involves identifying 'paper losses' - stocks or mutual funds trading below purchase price - and calculating realized gains to determine the optimal timing for harvesting losses.
Gold and silver funds are taxed based on holding periods, with different thresholds for ETFs and mutual fund funds of funds (FoFs). As reported by Upstox, short-term gains apply when holding gold/silver ETFs for less than 12 months or gold mutual fund FoFs for less than 24 months, with gains added to income and taxed at normal income tax rates. Long-term gains are taxed at 12.5% without indexation when held beyond these thresholds. According to Abhishek Soni, CEO & Co-founder of Tax2win, short-term capital losses can be set off against both STCG and LTCG, while long-term capital losses can only be set off against LTCG, with losses carry-forwardable for up to eight years.
The tax-loss harvesting strategy demonstrates significant post-tax return improvements. According to the analysis from Upstox, if an investor makes ₹3 lakh profit from a gold ETF and realizes a ₹1 lakh loss on another investment, their net capital gain becomes ₹2 lakh instead of ₹3 lakh. This reduces the total taxable gain and results in lower tax payments at applicable rates, ultimately leading to higher post-tax returns for investors. The strategy becomes particularly effective when combined with the ₹1.25 lakh exemption on long-term capital gains, where investors can offset losses against gains above this threshold.
As reported by Upstox, the new Act's carry-forward and set-off rules in Section 111(1) and (2) provide enhanced flexibility for loss management. Short-term capital losses can be set off against both STCG and LTCG, while long-term capital losses can be set off only against LTCG. These losses can also be carried forward for up to eight years to offset future gains, making the current period an ideal time for portfolio review and strategic tax planning. The strategy is most effective for investors in high-tax brackets or those with significant realized gains, with the 8-year carry-forward period providing long-term tax planning benefits.