If you happen to be an NRI, who recently gained from equity or stock investments in India, as markets have gone up by 90 percent in the last year, then you need to plan your long-term capital gains in equities as they are not tax-free any longer. Capital gains earned more than Rs 1 lakh on selling equities, including shares and mutual funds after a year are known as long-term capital gains (LTCGs).
Currently, long-term gains from equity funds in India are taxed at 10 percent. So, Tax Harvesting is the solution. It is a way to reduce LTCG taxes for higher returns. Tax harvesting utilises the Rs 1 lakh annual LTGC exemption by selling and buying back part of the investment. In 2018, the LTCG tax was introduced at 10 percent but it came with a break. The first Rs 1 lakh of LTCG is exempt from taxes of 10 percent. You could save up to Rs 10,000 in LTCG taxes at a 10 percent LTCG tax rate each year. Let’s see how.
Tax Harvesting starts with the sale of the stock on an equity fund that is experiencing a persistent price decline. You may feel that the asset has lost most of its value and chances of a rebound are bleak. When you realise the loss, you offset it against capital gains that your investment portfolio has earned over the period.
Now, let’s understand how tax harvesting works. Assuming that you bought equity mutual fund units of 10,000 at Rs 50 each in March. There is a clause you need to know and that is equity instruments are tax-free under LTCG till January 31, 2018. So, if you have invested in equities before this date, the cost of acquisition will be considered based on the value of shares, equity mutual funds, or the actual purchase price as of January 31, 2018. In this case, this clause will not apply as the investment is made after January 31, 2018.
However, tax harvesting is an effective method to save taxes, but NRI investors need to be mindful of the fact that the money should be invested soon after the gains are booked.
