In my earlier blog, I explained the concept of What Is Tax Harvesting and How To Do It. This article will detail on few of the things you should remember while doing Tax Harvesting.
Tax Harvesting Is Only For Equities
One of the most important things to remember while doing Tax Harvesting is that it can be done only for Equities like stocks and mutual funds. It cannot be done for debts instruments like bonds, fixed deposits etc.
Tax Harvesting can only be done on Delivery Based Trading. It cannot be done on Intraday trades where you are not taking any delivery.
Most of the times, people often forget or ignore Brokerage charges while doing Tax Harvesting. This is because brokerage charges are generally hidden and not displayed while buying and selling the stocks. They are only levied only during final settlement. Hence, always remember to consider the brokerage charges while planning your tax harvesting.
Also, note that you will have to pay brokerage charges for both buying and selling the stocks. So take that double brokerage into consideration when deciding which stocks to buy and sell.
Tax Harvesting is all about selling and then buying back the stocks. And even if you place orders one after other, chances are that you will get different buying and selling price. These price fluctuations can impact the overall profits. You might sell at lower price and buy at higher price. Hence, price fluctuations should be taken into account while doing Tax Harvesting.
If Tax harvesting is performed towards end of financial year and that too on same day, you will need large corpus. Since you are doing selling and buying of delivery based stocks, you will have to wait for few days before the money related to sold shares is credited in your account. In the meanwhile, if you want to buy the stocks, you should have money in the trading account.
Any profits from stocks or mutual funds purchased and sold upto 31st Jan 2018 were tax exempted. However, for stocks purchased before this date but sold on or after 1st Feb 2018, capital tax was applied. To give benefit to citizens, grand fathering was done where the price of all stocks/mutual funds purchased before 1st Feb 2018 was automatically set to the close of day price on 31st Jan 2018.
This way, when you will now sell the stock you had purchased anytime before 1st Feb 2018, you will have to consider the purchase price as grandfathered price (of 31st Jan 2018) to calculate your capital gain taxes.
Tax Harvesting is done on FIFO concept – First In First Out. This means stocks or mutual funds purchased first will be the ones which are sold first.
So for example, if you have purchased 100 Tata Motors stock on different dates like 1 Jan 2015, 2 Feb 2016, 5 Apr 2019 and then sell 75 stocks on 31 Sep 2019, your deduction will happen from the 100 stocks you had purchased on 1st Jan 2015. Not from the stocks you purchased on 5 Apr 2019. This is something you will have to remember while calculating the LTCG and STCG to do tax harvesting.
If you remember these tips while doing tax harvesting, you will be able to save more money on capital gain taxes.