Srivathsan, a finance professional is an investor in stocks and shares. FY 20-21 has been a rollercoaster ride in the stock market. Like many others, he took advantage of the rise in prices since Dec 2020 and made handsome profits from shares like BAJAJ FINANCE. His friend who is also an active participant in the stock market, suggested that he should do some “tax loss harvesting” and reduce his tax impact. Looking further into his portfolio, he found that shares like INDIAN BANK have unrealised loss. Srivathsan is contemplating on “tax loss harvesting” from Indian Bank shares. Will this result in an advantage for him?

Tax loss harvesting is a common concept that is being discussed by traders and investors at large now as a “tax saving mechanism”. But will this definitely result in a tax benefit?

What is “TAX LOSS HARVESTING”?

It is the practice of selling and booking the loss to offset gains in some other set of shares. Once this is done, the same share is bought on the very next day. By this exercise, one ensures that the portfolio remains intact and also helps in offsetting the gains.

While tax loss harvesting as a concept is enticing, one should understand that this might always not be beneficial. Let’s take numbers for Srivathsan’s case to have a better understanding.

DATE SHARE RATE 
10 May 2019 Bajaj Finance Rs. 2,922 
24 May 2019 Indian Bank Rs. 265 
12 Mar 2021 Bajaj Finance Rs. 5,538 
12 Mar 2021 Indian Bank Rs. 131 

Share price history

Srivathsan bought 100 shares of Bajaj Finance on May 10, 2019 for Rs. 2,922 each and sold them at Rs. 5,538 each on March 12, 2021. Long term capital gains on this sale transaction amounts to Rs. 2,61,600. He had also purchased 1000 Indian Bank shares at Rs. 265 on May 24, 2019. His unrealised loss position on Indian Bank shares amounts to Rs.1,34,000.

As per the advice of his friend, if Srivathsan does a “tax loss harvesting” by selling the 1000 Indian Bank shares (by delivery) and purchases the same next day, he will be able to reduce his long term capital gains for the FY 20-21 by Rs. 1,34,000. However if we look at the bigger picture, he might only be deferring his tax liability to subsequent period. Further, by doing this he is changing the character of this asset from “long term” to “short term” and thus might pay tax at a higher rate (15% on ST as against 10% on LT).

Points to remember:

1. Beneficial to a trader as he may deal mostly in short term. Investors need to analyze on a case to case basis before taking a call.

2. From a liquidity stand point, this exercise is worth considering during the month of March.

How can we help you?

Various clauses from the Income Tax Act may be simplified in online contents. But most of the time, it requires professional help in identifying suitable route for specific instances. Similar to nurturing and taking care of personal health, it is important to also keep a tab on one’s financial health. We at Chockalingam Unnamalai & Associates, can help you understand the pros and cons of various choices you make in the context of personal taxation. You can bank on us for a stress free tax filing and related compliances.

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CA Chockalingam K
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