How to reduce income tax by loss harvesting in weak stock market — explained

According to tax and investment experts, an income taxpayer who has made significant gains this fiscal year can post losses in their stock holdings that are trading below their average purchase price and offset the capital loss against capital gains when filing their income tax return (ITR) for fiscal year 2022 -23.

Tax and investment experts added that collecting tax losses would help investors reduce the risk of further losses in a weak market. They advised income taxpayers to take a new position at the counter and hold it for the long-term if the stock drops further. However, they advised taxpayers to avoid market timing after posting the loss in their stock positions.

Aarti Raote, Partner at Deloitte India, spoke on how to reduce income tax by offsetting losses in a weak stock market: “Income tax regulations allow an individual to offset capital losses against the capital gains of the financial year may sell shares in its portfolio if share prices fall sharply and are expected to fall further. The loss suffered on such stocks can be offset against profits from other trades. Not only does this help the taxpayer reduce the tax outflow, but it also eliminates the possibility of further losses if stock prices fall and balances the risk on their portfolio. However, when using this option, one should keep in mind that short-term losses can be offset against short-term ones -Long-term and long-term gains, but long-term losses can only be offset against long-term gains. So selling the right type of stock holdings is important here.”

Rules for tax loss absorption

Explaining the tax loss deduction rules for income taxpayers, Vinit Khandare, CEO and Founder of MyFundBazaar said: “By investing in equity funds, an investor is known to make capital gains – taxable depending on how long one remains invested in the particular fund sold at tax-loss harvesting the investor sells his shares/fund shares at a loss in order to reduce his tax burden on capital gains – a lucrative method of offsetting the capital gains from equity with the capital loss suffered in order to pay a lower amount of tax, there are a few factors to consider when taxing losses – a long-term capital loss can only be offset against long-term capital gains.”

The MyFundBazaar expert said that the investor cannot offset long-term capital losses against short-term capital gains. While short-term capital losses can be offset against either short-term capital gains or against long-term capital gains – a method of offsetting the capital gains on equity against the capital loss suffered in order to pay a smaller amount of tax.

Don’t try to time the market

Rahul Agarwal, a certified financial planner, cautioned that one should follow when winning losses: “While winning tax losses, one should not try to time the market. Attempting to do so can result in a waste of the entire exercise.” He advised taxpayers to take losses in their portfolio stocks that bleed and, after a further drop, to reinstate the stock, which will save their brokerage fees and compensates for taxes paid while making pluses and minuses from the existing position.

Sectors where loss harvesting can be applied

Manoj Dalmia, Founder and Director of Proficient Equities, said of the sectoral stocks where a taxpayer can seek to offset losses: “Amidst a weak stock market, taxpayers looking forward to losses at the harvest may find losses in their metal portfolio stocks and large-cap IT and oil and gas.”

Disclaimer: The views and recommendations made above are those of individual analysts, experts or brokerage firms and not of Mint.