Indian stock markets experienced a significant downturn on Friday, with the Sensex falling over 900 points and the Nifty dropping more than 1%, as geopolitical tensions surrounding the conflict between Iran and Israel escalated. The sell-off has wiped out nearly Rs 34 lakh crore from the total market capitalisation of BSE in March, according to reports.
The market decline comes amid rising concerns about the potential impact of the conflict on global oil prices and economic stability. Crude oil prices have remained elevated, trading above $75 a barrel, adding to investor anxieties. Gift Nifty, an indicator of the Nifty 50’s future performance, signaled a positive start for Monday, but the overall sentiment remains cautious.
Amidst the market volatility, financial experts are advising investors to consider tax harvesting strategies to mitigate potential losses and optimize their tax liabilities. Tax harvesting encompasses two primary methods: tax-loss harvesting and tax-gains harvesting.
Tax-loss harvesting involves selling equities that have incurred losses to offset capital gains in future years. According to tax and investment expert Balwant Jain, losses can be carried forward for up to eight assessment years. For example, an investor who sold shares at a profit and as well sold shares at a loss can use the loss to reduce their overall tax burden. “Unless you sell the shares, you cannot claim the loss under Income Tax law,” Jain explained.
For short-term capital gains – profits from shares held for less than 12 months – the tax rate is a flat 20%, without the benefit of the Rs 1.25 lakh exemption available for long-term capital gains. Investors can book losses to offset these short-term gains, reducing their tax liability.
Investors concerned about missing out on potential future gains from stocks they wish to sell for tax-loss harvesting can repurchase the same stock in a different trading account on the same day, or the following day if they only have one demat account. Yet, intraday sale and repurchase within the same account will not qualify for tax-loss harvesting.
Tax-gains harvesting is another strategy where investors selectively sell portions of their holdings to remain within tax exemption limits. For instance, an investor with shares held for over 12 months could sell a specific number of shares to bring their total gains under the Rs 1.25 lakh exemption threshold, thereby avoiding capital gains tax.
Recent changes to capital gains tax rates, revised in the July 2024 budget, have further emphasized the importance of tax planning. The short-term capital gains tax rate was increased from 15% to 20% for shares held less than 12 months, while the long-term capital gains tax rate remains at 12.5% on gains exceeding Rs 1.25 lakh.
