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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
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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.

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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.

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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


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