Shefali Mundra

Tax-loss harvesting

This strategy is crucial for investors holding stocks or mutual funds (MFs) that underperformed. By selling these at loss, you can offset the capital gains on other investments, reducing your overall tax liability. In India, you can set off capital losses against capital gains — short-term losses can be set off against both short and long-term gains (STCG/LTCG), while long-term losses are restricted to being set off against long-term gains only. Let’s understand with an example:

Saumya has invested in stocks and MFs. At the end of the financial year, her portfolio has STCG ₹5,00,000 and LTCG at 10,00,000. So, the total tax liability is ₹2,09,375.(See Table 1)

However, worried about certain underperforming stocks, she decided to sell them and booked a short-term loss of ₹1,50,000. She took advantage of tax loss harvesting and reduced the overall tax liability for the year.

The total tax liability is ₹1,79,375 (See table 2). The total tax liability was reduced by ₹30,000 (₹2,09,375 - ₹1,79,375).

Set-off of capital gains

The Income Tax Act allows the setting off losses against gains from capital assets, which can be a powerful way to cut taxable income. Short-term capital loss can be adjusted against both short-term and long-term capital gains while long-term capital loss can be only adjusted against the long-term capital gains. Planning sale of assets to align with this can maximise your tax benefits, especially if you strategically realise losses in the same year as gains. Capital losses can be carried forward for eight assessment years.

Capital gains account scheme

If you sell a property and plan to reinvest the proceeds into another property or in specified assets, you can defer paying capital gains tax by depositing the proceeds in a capital gains account under the Capital Gains Account Scheme in any public sector bank. This must be done before the due date of filing Income Tax returns and the funds must be used to buy or construct a new property within the specified time frames.

Maximising deductions

Under Sec 80C you can claim deductions up to ₹1.5 lakh for investments in ELSS, PPF, NSC, life insurance premiums and repayment of principal on home loans. Under Section 80D, premiums for medical insurance can be deducted up to ₹25,000, which rises to ₹50,000 for senior citizens. Under Sec 80G, contributions to charitable organisations can aid tax deductions, of up to 50%/100% depending on the eligibility of charitable organisation.

Advance tax payments

As per Indian tax laws, if estimated tax liability for a year crosses ₹10,000, you must pay advance tax. This is done in four instalments over the year (15th June, 15th September, 15th December and 15th March). Ensuring the payments are made on time on anticipated capital gains income can help avoid interest penalties under Sec 234B and 234C of the Income Tax Act. With the fiscal year-end approaching, now is the time to review your financial portfolio and make smart moves to minimise tax liability. Consulting a tax advisor to tailor the strategies to your personal financial situation is recommended.

(The author is a tax expert with ClearTax)

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