How to Use Tax Harvesting to Save Tax on Stock Market Profits ?
Welcome to our blog How to Use Tax Harvesting to Save Tax on Stock Market Profits. Simply put, tax harvesting is a smart trick to cut down your tax bill on stock market earnings. The idea is easy – if you have some shares or mutual funds running at a loss, you sell them to adjust against the profits you made from other investments. This way, your taxable income goes down and you save on taxes. Later, you can buy back the same or similar stocks to keep your portfolio on track. Many investors in India use this method, especially before the financial year ends, to reduce taxes and boost overall returns. Done the right way, it’s a legal and effective way to make your money work smarter for you.
What is Tax Harvesting?
Tax harvesting is a strategy where you sell your shares or mutual funds in a planned way to reduce the amount of tax you pay on capital gains. If you have made profits on some investments, you can sell other investments that are in loss. These booked losses can be used to adjust your overall taxable income, which lowers your tax liability. This way, you are not only following the tax rules but also using them smartly to your benefit.
Many investors use tax harvesting before the financial year ends. The idea is simple – sell the investment, book the profit or loss, and then buy it back so your portfolio value remains the same, but your purchase price gets reset. This fresh purchase price helps in better tax planning for the next year. In short, tax harvesting is like giving your portfolio a “tax-friendly reset” that saves money without affecting your long-term investment goals.
How Tax Harvesting Works in Stock Market
Tax harvesting may sound complicated, but it’s actually very simple once you see it in action. Let’s break it down with an easy example.
Here’s how tax harvesting works in a simple step-by-step way:
You buy shares worth ₹50,000.
Their value increases to ₹80,000.
Your profit is ₹30,000.
If you sell them now, the profit comes under long-term capital gains.
The government gives a ₹1,00,000 exemption limit on long-term capital gains every year.
So, by selling these shares before the financial year ends, you can book the ₹30,000 profit tax-free.
After selling, you can buy back the same shares at the new price of ₹80,000.
Now, your purchase price is reset to ₹80,000.
In the future, only gains above ₹80,000 will be taxed.
This strategy helps you use your tax-free limit every year and save more on taxes legally.
Benefits of Tax Harvesting for Investors
✅ Save Tax Legally – Utilize the ₹1,00,000 exemption limit on long-term capital gains each year and avoid paying extra tax.
✅ Boost Post-Tax Returns – Lower tax means higher net returns, which helps you build wealth faster.
✅ Reset Investment Cost – By selling and repurchasing, your investment’s cost price resets to the current market value, reducing future taxable gains.
✅ Smart Year-End Planning – Helps in adjusting your portfolio before the financial year ends, making tax filing easier.
✅ Stay Fully Invested – You can sell and immediately buy back the same shares or mutual funds, so your growth potential continues.
✅ Use Losses Effectively – Capital losses can be set off against gains, reducing your overall taxable income.
✅ Flexibility Across Assets – Tax harvesting can be applied to both stocks and mutual funds, giving you more options.
✅ Better Long-Term Strategy – Over time, consistent tax savings compound and improve your financial planning.
Rules and Eligibility for Tax Harvesting in India
In India, tax harvesting works within the rules of capital gains taxation. For equity shares and equity mutual funds, if you hold them for more than 12 months, the profit is called long-term capital gains (LTCG). The government allows you to earn up to ₹1,00,000 in LTCG every year without paying any tax. If your profit goes above this limit, the extra amount is taxed at 10%. On the other hand, if you sell your shares or mutual funds before 12 months, it becomes short-term capital gains (STCG), which is taxed at 15%, no matter how much profit you make. You can also adjust your losses against gains to bring down your overall tax.
Anyone who invests in the stock market or mutual funds – whether an individual, HUF, or business – can use tax harvesting. There are no limits on how many times you can do it, but it must be done before 31st March of the financial year to get the benefit. The process is completely legal, but you should keep clear records of your transactions. If done smartly, tax harvesting can help you save money every year while still keeping your investments on track.
Documents Required for Tax Harvesting
Before you start tax harvesting, it’s important to keep the right documents ready. These will help you calculate your gains or losses accurately and ensure smooth filing at the time of income tax return.
Here’s the list of required documents:
📄 Demat Account Statement – To check your shareholding and transaction history.
📄 Trading Account Summary – To track buy/sell details and profits or losses.
📄 Mutual Fund Statement (if applicable) – For details of SIPs, redemptions, and capital gains.
📄 PAN Card – Mandatory for tax filing and linking your investments.
📄 Basic KYC Documents (Aadhaar, Address Proof, Bank Details) – Needed for compliance and verification.
Charges Involved in Tax Harvesting
Whenever you sell and repurchase shares or mutual funds for tax harvesting, a few charges apply. These charges are very small compared to the tax savings you enjoy, but it’s important to know them in advance.
Here are the common charges involved:
Brokerage Charges – A fee charged by your stockbroker on every buy and sell transaction. This can be a flat fee or a percentage, depending on your broker.
STT (Securities Transaction Tax) – A government tax levied on the purchase and sale of equity shares and equity-oriented mutual funds.
Exchange Transaction Charges – Small fees charged by the stock exchange on every trade.
GST on Brokerage – 18% GST is applicable on the brokerage amount charged by your broker.
Stamp Duty – A very minimal charge collected on the purchase of securities as per government rules.
Step-by-Step Process of Tax Harvesting
Tax harvesting is easy if you follow a simple process. It helps you save tax legally while keeping your investments safe and growing. Here’s how you can do it step by step:
1️⃣ Check Your Capital Gains – Review your Demat account or mutual fund statement to find out how much profit or loss you have made during the financial year. This gives you a clear idea of your taxable income from investments.
2️⃣ Compare with the Tax-Free Limit – For equity shares and equity mutual funds, long-term capital gains (LTCG) up to ₹1,00,000 in a financial year are completely tax-free. Check how much of this limit you have already used.
3️⃣ Sell Investments to Book Profits or Losses – If your gains are below the tax-free limit, sell some investments to realise the profit without paying tax. If you have losses, sell those investments to adjust them against your profits.
4️⃣ Repurchase the Same or Similar Investment – After selling, buy back the same shares/mutual funds (or a similar option) so that your portfolio value and future growth remain unaffected. This resets your cost price to the current market level.
5️⃣ Maintain Records for Filing – Keep contract notes, Demat statements, and mutual fund reports as proof. These documents are useful when filing your Income Tax Return (ITR) and in case of any future queries.
Common Mistakes to Avoid in Tax Harvesting
Selling without checking actual tax liability – sometimes no need to sell if gains are already below the ₹1,00,000 limit.
Forgetting to repurchase after selling – may lead to missing future growth opportunities.
Ignoring transaction charges – brokerage, STT, GST, stamp duty, and exit loads can reduce savings.
Not keeping proper records – lack of contract notes or statements can create issues in ITR filing.
Overdoing tax harvesting – frequent trades may disturb long-term investment goals.
Confusing short-term and long-term gains – tax rules differ, so check holding period before selling.
Waiting till the last moment – rushing near 31st March may cause mistakes or missed opportunities.
Not considering exit load in mutual funds – early redemption may cost more than the tax benefit.
Selling fundamentally strong stocks just for tax saving – can hurt long-term compounding.
Not consulting a tax expert – small mistakes in calculation or reporting can lead to penalties.
Expert Tips for Effective Tax Harvesting
✅ Plan Early – Don’t wait till the last week of March. Start checking your portfolio 1–2 months before year-end so you get enough time to act smartly.
✅ Take Expert Help – A CA or tax advisor can tell you exactly how much to sell and how to show it in your ITR for maximum savings.
✅ Mix with Other Tax Savings – Use tax harvesting along with other options like 80C investments, health insurance (80D), or property exemptions to cut down your total tax.
✅ Don’t Over-Sell – Selling too often just to save tax can increase brokerage, STT, or exit load costs. Do it only when it makes sense.
✅ Keep All Records – Save your contract notes, Demat statements, and MF reports so filing tax becomes easy and hassle-free.
✅ Think Long-Term – Tax saving is good, but don’t disturb strong investments only for short-term benefits. Always keep your financial goals in mind.
Your Trusted Consultant for Tax Harvesting Services
Tax harvesting, if done correctly, can save you a lot of money every year. But many people make mistakes in calculating gains, repurchasing shares, or filing their ITR, which reduces the benefit. With the right planning, you can use tax harvesting to cut down your tax bill and still keep your long-term investments safe.
At legaladda.com, we make tax harvesting easy and stress-free. Our team guides you step by step – from checking your capital gains to planning your transactions – so you get the maximum savings without errors. Call us today at +91 97263 65804 and let us help you save more with smart tax planning.
