Arthgyaan

Supporting everyone's personal finance journey

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.

Budget 2024: How to do tax harvesting for your shares and mutual funds?


Posted on 25 Jul 2024
Author: Sayan Sircar
Tags: Tags Budget ;  Tax
11 mins read
📢Join 3200+ readers on WhatsApp and get new post notifications!

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.

Budget 2024: How to do tax harvesting for your shares and mutual funds?

This article is a part of our detailed article series on Union Budget 2024. Ensure you have read the other parts here:

📚 Topics covered:

What did Union Budget 2024 change about tax harvesting?

If you read our guide on changes in Capital Gains taxation in Union Budget 2024, for these type of investments:

  • Domestic Stocks
  • Equity Mutual Funds with 65% or more domestic stocks (or arbitrage positions in domestic stocks)
  • Hybrid Mutual Funds with 65% or more domestic stocks (or arbitrage positions in domestic stocks) like arbitrage, equity savings or aggressive hybrid
  • Fund of Funds holding 90% or more in domestic ETFs

The Capital gains tax calculation becomes:

  • Short-term holding period: 365 days or less, otherwise long-term
  • Short-term capital gains tax rate: 20% (up from 15%)
  • Long-term capital gains tax rate: 12.5% (up from 10%)

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.

Techniques of Tax Harvesting

Tax harvesting is one of the tasks that you must perform in the month of March every year.

Loss Harvesting Using Offsetting Transactions

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.

Using Different Folios

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.

Did you know that we have a private Facebook group which you can join for free and ask your own questions? Please click the button below to join.

Also read
How should you plan your investments and taxes in April?

One Lakh Twenty Five Thousand Equity LTCG Booking

If units sold in different funds are sold at a price higher than the purchase price and the total profit is:

  • less than 1.25 lakhs then the tax is zero.
  • more than 1.25 lakhs then tax of 12.5% (+ cess + surcharge) is payable on the amount more than 1.25 lakhs.

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:

With 1.25 lakhs Exemption Rule

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

Without 1.25 lakhs Exemption Rule

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.

Edge case: ₹ 1 lakh LTCG booked before the budget already

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.

What's next? You can join the Arthgyaan WhatsApp community

You can stay updated on our latest content and learn about our webinars. Our community is fully private so that no one, other than the admin, can see your name or number. Also, we will not spam you.

For resident Indians 🇮🇳:


For NRIs 🇺🇸🇬🇧🇪🇺🇦🇺🇦🇪🇸🇬:


Share on WhatsApp:

To understand how this article can help you:

If you have a comment or question about this article

The following button will open a form with the link of this page populated for context:

If you liked this article, please leave us a rating

The following button will take you to Trustpilot:

Discover an article from the archives

Previous and next articles:

<p>This article analyses the most important changes affecting your portfolio as per the Union Budget 2024.</p>
Budget Tax
Union Budget 2024: What are the most important changes that will now affect your portfolio?

This article analyses the most important changes affecting your portfolio as per the Union Budget 2024.

Published: 24 July 2024

10 MIN READ

<p>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.</p>
Budget Mutual Funds Tax
Budget 2024: How will international, debt and gold/silver funds get taxed going forward?

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.

Published: 25 July 2024

3 MIN READ

Latest articles:

<p>This article analyses the changes in Budget 2024 that impact investors investing abroad under the RBI’s Liberalised Remittance Scheme.</p>
International Investing Budget
Budget 2024: How New Changes Make International Investing under LRS Easier for Indians?

This article analyses the changes in Budget 2024 that impact investors investing abroad under the RBI’s Liberalised Remittance Scheme.

Published: 8 September 2024

4 MIN READ

<p>This article analyses the portfolio of the Franklin India Ultra Short Duration Fund to see if there any potential red flags similar to what led to the closure of six Franklin debt funds in April 2020.</p>
Mutual Funds
Franklin India Ultra Short Duration Fund portfolio analysis: Is Franklin Templeton creating the same portfolio that shut its funds in Apr 2020?

This article analyses the portfolio of the Franklin India Ultra Short Duration Fund to see if there any potential red flags similar to what led to the closure of six Franklin debt funds in April 2020.

Published: 6 September 2024

5 MIN READ

Topics you will like:



Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself.

Don't forget to share this article on WhatsApp or Twitter or post this to Facebook.

Discuss this post with us via Facebook or get regular bite-sized updates on Twitter.

More posts...

Disclaimer: Content on this site is for educational purpose only and is not financial advice. Nothing on this site should be construed as an offer or recommendation to buy/sell any financial product or service. Please consult a registered investment advisor before making any investments.

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


We are currently at 468 posts and growing fast. Search this site:
Copyright © 2021-2024 Arthgyaan.com. All rights reserved.