Use Tax Harvesting Before March 31 Deadline, Know the Strategy

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Tax Harvesting: The financial year 2025-26 is nearing its conclusion. Engaging in tax harvesting can assist in lowering your tax obligations before the new financial year kicks off. This needs to be done prior to April 31st. The upcoming financial year (2026-27) starts on April 1st. So, what exactly is tax harvesting and how can it be utilized?

Tax harvesting is a method aimed at minimizing capital gains tax, particularly concerning stocks and equity mutual funds. This approach must be executed before the financial year wraps up, specifically before March 31st. Consequently, you need to realize all capital gains or losses by March 31st. There are two categories: tax gain harvesting and tax loss harvesting. Both strategies are designed to enhance post-tax returns depending on varying market conditions.

Tax-Gain Harvesting Strategy

In this approach, an investor realizes long-term capital gains (LTCG) by selling investments in equity mutual funds or stocks that have been held for over 12 months, within the tax exemption threshold. The earnings are then reinvested. This alters the purchase price and lessens the investor’s future tax obligations.

Taxpayers should aim to utilize the tax-free allowance on long-term capital gains each financial year. Gopal Bohra, Partner (Tax) at Shah Associates, mentioned, “If you fail to utilize the tax-free limit of Rs 1.25 lakh on long-term capital gains within a financial year, it is wasted. Taxpayers can benefit from long-term capital gains up to Rs 1.25 lakh without incurring any tax liability.”

Tax-Loss Harvesting Strategy

In this method, shares or units of equity mutual funds are sold at a loss. The capital loss can then be offset against taxable capital gains, thereby lowering the overall tax liability. “Realizing such losses decreases the tax burden on other capital gains,” Bohra stated. “However, it is important to remember that long-term capital losses can only be set off against long-term capital gains,” he added.

Both strategies aim to minimize tax liability. Tax experts advise investors to avoid reinvesting in the same securities they previously invested in. This can eliminate underperforming stocks from their portfolios. This also rebalances the portfolio.

 

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