Tax Loss Harvesting is a tool that allows you to adjust your capital gains and save on your taxes.

How does Tax Loss Harvesting work?

Tax Loss Harvesting helps you reduce your taxable income by offsetting your capital losses against your realised gains.

When you sell loss-making stocks, those losses can be used to reduce your total realised profits, which in turn lowers the amount of tax you need to pay.

This tool provides a consolidated view of your loss-making scrips, allowing you to identify which ones you can sell to optimize your tax outgo.

Here’s what the key terms mean:

i. Realised Profits: The actual gains you’ve made by selling your stocks.

ii. Unrealised Losses: The losses on your holdings that you haven’t sold yet — they show the potential loss if you sell those stocks now.

iii. Tax Liability: The total tax you are required to pay on your realised profits.

iv. Tax Saving Opportunity: The estimated tax amount you could save by selling your loss-making stocks and offsetting those losses against your gains.

How do I harvest my losses?

You can harvest your losses by offsetting the losses against realised profits, thereby reducing the realised profit amount. As your profits reduce, so will your tax liability.

To sell your loss-making stocks, follow the steps below:

1. Go to Tax Loss Harvesting under Portfolio tab

2. This page will display the unrealised losses and realised profits you are making in the short-term and long-term. You can view the amount of unrealised losses under short-term/long-term and the amount of taxes you will save by realising these losses.

3. Scroll down to the Tax Saving Opportunities table. This table lists all of the stocks in which you are incurring losses, with a segregation of quantity as per the period for which the stocks were held i.e. short-term or long-term.

4. Under the Action column, click on the Sell button. You will be redirected to the Place Order page.

5. Enter the order details and click on Sell.

6. Now, click on Proceed.

7. The values of Realised profits and Tax liability would have adjusted on the next day.

What are the tax rates for short-term and long-term capital gains?

The tax rates for short-term and long-term gains are 20% and 12.5% respectively. Also, Rs. 1.25 lacs is exempt from taxes for long-term capital gains.

Example

1. Suppose you are currently making realised profits worth Rs. 1 lac in the short-term.

ii. Now, your tax liability will be Rs. 20,000. (20% of 1 lac)

iii. Let’s say the amount of unrealised losses you are making in the short-term is Rs. 30,000.

iv. By using Tax Loss Harvesting, you can view the loss-making stocks and reduce your tax liability. Now, your new realised profit will be reduced by Rs. 30,000, thereby making it Rs. 70,000.

v. Your new tax liability after offsetting losses will be Rs. 14,000 (20% of Rs. 70,000). You have saved Rs. 6,000 on taxes by harvesting your losses.

Additional pointers:

1. The impact of shares sold today will be updated on the page on T+1 day

2. Capital gains are calculated using the FIFO (First-In First-Out) method. If a stock comprises both Short-Term and Long-Term holdings, the entire Long-Term holding must be sold first to book any Short-Term profit/ loss.

3. While computing the Tax Liability on Long-Term Capital gains, the first ₹1.25 lakh of Long-Term gains is Exempt from tax.

4. There will be no Tax-Loss Harvesting opportunity when there are no realized profits. Although, realized losses (both Long-Term and Short-Term) can be carried forward for up to 8 years and can be used to offset profits of the subsequent years.

5. When Short-Term Realized profit is less than Short-Term Unrealized loss, then excess loss can be utilized to offset Long-Term Realized profits.

6. It is advisable to consult your CA to verify the Buy average and the P&L across all Portfolio’s held before you decide to sell.

7. Charges such as Brokerage, GST, STT, Stamp Duty, etc are not taken into consideration while arriving at Tax loss harvesting opportunity