Budget 2024: How to do tax harvesting for your shares and mutual funds?
This article shows you how to do tax harvesting for shares and mutual funds as per the new capital gains tax declared in the Union Budget 2024.
This article shows you how to do tax harvesting for shares and mutual funds as per the new capital gains tax declared in the Union Budget 2024.
This article is a part of our detailed article series on Union Budget 2024. Ensure you have read the other parts here:
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This article explains the new of the reversal of the 12.5% without indexation tax rule to allow 20% with indexation for all properties bought before 23rd July 2024.
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This article discusses the impact on investors’ psyche due to impact on Gold price due to government policy change.
This article shows you how debt, international and gold/silver mutual funds will get taxed as per the new capital gains tax declared in the Union Budget 2024.
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This article analyses the change in taxation of stocks and mutual funds as per the Union Budget 2024.
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This article describes how to use the Arthgyaan goal-based investing tool as a calculator to determine if switching to the New Tax Regime makes sense from 1st April 2024.
This article analyses the change in taxation of real estate sales in India as per Union Budget 2024.
If you read our guide on changes in Capital Gains taxation in Union Budget 2024, for these type of investments:
The Capital gains tax calculation becomes:
No long-term capital gains tax below ₹1.25 lakhs per PAN in this category per financial year. Earlier, this limit was ₹1 lakh.
We can therefore use the ₹1.25 lakhs exemption limit to save ₹10,000 tax per year by increasing the basis (purchase price) of your equity mutual fund (or share) units.
Tax harvesting is one of the tasks that you must perform in the month of March every year.
The profits obtained from the sale of some funds can be offset by deliberately selling other funds whose oldest units are at a loss.
Date | Folio | Fund | Transaction | Units | Price | Comment |
---|---|---|---|---|---|---|
1 | A | X | Buy | 100 | 10 | First buy |
2 | B | Y | Buy | 100 | 12 | First buy |
3 | A | X | Sell | 50 | 12 | 50*2=100 profit |
4 | B | Y | Sell | 25 | 8 | 25*(12-8)=100 loss |
For example, we sell 25 units of fund Y to offset the profit from selling 50 units of fund X.
If you are planning to keep investing in fund Y, selling units from Y now lowers the average purchase price of the remaining units. This leads to higher taxes in the future and needs to be weighed vs. saving taxes today.
Some investors prefer to segregate portfolios using different folio numbers and tag them to different goals as described here. This leads to a logical separation of goals and allows the booking of capital gains as per requirement.
If units sold in different funds are sold at a price higher than the purchase price and the total profit is:
So if the LTCG is ₹145,000, then the tax payable is ₹20,000 * 12.5% = ₹2,500 + cess + surcharge.
This feature of the tax code gives an opportunity to book ₹125,000 profit every year in equity funds or stocks to save ₹10,000 in taxes. Note that this feature is calculated on ₹1.25 lakh of profits and not on the sale consideration.
For example:
Item | Price/Amount |
---|---|
Purchase price (A) | 100 |
Units (B) | 10,000 |
Book value (C=A*B) | 10,00,000 |
Current price (D) | 250 |
A year or more later | – |
Units sold (F) | 840 |
Market value (G=F*D) | 210000 |
Capital gains H=(D-A)*F | 126,000 |
Taxable capital gains = H - 1.25lakh | 1,000 |
Tax @ 12.5% = T1 | 125 |
Units repurchased at 250 = U = G/D | 840 |
A year or more later | – |
Current price (D2) | 350 |
All units sold F2 = B-F+U | 10,000 |
Market value M=F2 * D2 | 35,00,000 |
Purchase amount = X = (B-F)*A + G | 11,26,000 |
Profit = P = X-M | 23,74,000 |
Taxable capital gains = P - 1.25lakh | 22,49,000 |
Tax @ 12.5% = T2 | 281,125 |
Total tax = T1+T2 | 281,250 |
Item | Price/Amount |
---|---|
Purchase price (A) | 100 |
Units (B) | 10,000 |
Book value (C=A*B) | 10,00,000 |
A year or more later | – |
Current price (D) | 350 |
All units sold (B) | 10,000 |
Market value (E=D*B) | 35,00,000 |
Capital gains (F=E-C) | 25,00,000 |
Taxable capital gains G=F-1.25 lakh | 23,75,000 |
Tax @ 12.5% = G * 12.5% | 296,875 |
Tax with harvesting | 281,250 |
Tax saved due to harvesting | 15,625 |
This example shows that harvesting 840 units after year 1 saved ₹15,625 tax. While using this method, the investor has to be mindful of the concept of the wash sale rule. It is better to combine LTCG harvesting along with portfolio rebalancing so that the sale proceeds are invested in different funds. You can do this either in March or throughout the year. The exemption is for total sales over the year.
Here we discuss one edge case. ₹1 lakh of equity LTCG has already booked before 23rd July, 2024. Can the investor book another ₹25,000 equity LTCG after 23rd July and pay no tax?
To answer this question, we must remember that Union Budget 2024 applies only from 23-Jul-2024. Therefore, any units already sold between 1st April 2024 to 22nd July 2024 will be taxed at the old rates. The rates image is a screenshot of the AMFI tax page as on 25th July 2024.
However, since the Budget speech and the Finance Bill does not mention any concept of pro rata for the ₹1.25 lakhs amount, we will assume that an additional ₹25,000 equity LTCG will be tax-free as well since the total for the whole FY2024-25 will be ₹1.25 lakhs.
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This post titled Budget 2024: How to do tax harvesting for your shares and mutual funds? first appeared on 25 Jul 2024 at https://arthgyaan.com