InvestorQ : What is tax-harvesting? What are its benefits?
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What is tax-harvesting? What are its benefits?

Answer
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9 months ago


In general terms tax harvesting means to take advantage of the tax-free window up to Rs. 1 lakh by redeeming your equity investments of the same amount and simultaneously re-invest, to the extent that the gains do not exceed Rs. 1 lakh. These investments should be long-term in nature, say over one year old. By doing so, your net investment does not change, but you shield yourself towards capital gain up to Rs. 1 Lakh from getting taxed. This will help you reduce your overall tax liability when all your investment/equity will be sold.

How does it help practically?

To understand tax-harvesting practically you need to picture how your investment works. Suppose an investor invested Rs. 5000/month in a NIFTY 50 TRI index fund from 2001 until March 2018. For ease of understanding, let's assume that for any financial year, the entire investment was done only once in March, at Rs 60,000/year. Assume that current tax scenarios are applicable, the investor actively deploys the tax-harvesting strategy every year. If the investor sells all investments in March 2019, the proceeds that will be realized are 47,06,347 which are almost Rs. 100,000 lesser if the investor has not followed the tax-harvesting strategy.

Pros and Cons of Tax-harvesting:

While the benefits of tax-harvesting include tax-saving and reduction in taxable proceeds of an investor, it involves a lot of hassle for general investors and such less benefit sometimes is not worth the hassle involved. However, tax-saving with tax-harvesting will always be restricted. In any year maximum tax that can be saved would not be more than Rs 10,000 (10% of Rs 100,000). Besides this, it has some other problems too, as to maintain continuity of investments, one needs to re-invest in equity funds as soon as you redeem the older units for tax-harvesting. This will require you to maintain an attractive sum in your bank account.