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An Insight into Tax Harvesting: How to Strategize It for Mutual Fund Returns?

Submitted by admin on June 8th, 2024

Tax harvesting is a strategic planning and application to minimize investors’ tax liabilities by counterbalancing losses with gains. This approach is particularly beneficial for mutual fund investors in 2024.

Knowing capital losses from underperforming mutual funds will help investors use these losses to counterbalance the taxes that apply to capital gains from profitable funds. Hence, tax harvesting is an effective way to enable investors to ease off their overall tax burden and keep more of their gains with them.

This blog is meant to guide you in exploring tax harvesting and how to strategize it for mutual fund portfolios.

Tax Harvesting & Mutual Funds

When it comes to mutual funds, tax harvesting involves mutual fund sales at a loss to neutralize capital gains from other investment options. The purpose is to reduce tax liability. This strategy makes the most of particular tax provisions that allow for loss adjustment in respect to gains.

Furthermore, investors can apply a strategy of profit booking up to Rs 1 lakh and purchasing back the similar or same investments. With gains up to Rs 1 lakh exempted from taxes, tax harvesting effectively makes your ROI tax-free, which is akin to the idea of wash sales.

Tax Harvesting for Mutual Funds: Developing an Effective Strategy

The most common strategies of tax harvesting in the realm of mutual funds are listed below:

Selling Underperforming Mutual Funds: An easy way of strategizing tax harvesting is to sell mutual funds. If you become aware of the losses, you can effectively offset gains from your other investments. The strategy will reduce your overall taxable income. This practice is usually continued until the financial year does not come to an end, reducing further losses for tax purposes.

Exploring Wash Sales: A wash sale involves selling a mutual fund at a loss and purchasing it back shortly after, enabling investors to book losses for tax purposes while maintaining their investment portfolio. Though it is highly effective, you should use the strategy carefully to avoid unwarranted inquiries by tax authorities.

Switching Between Mutual Fund Schemes: Another method involves switches between mutual fund schemes from the same fund house. Switching from a non-profitable scheme to another one can help investors realize these losses against profits from other funds so that they can reduce their taxable income.

Tax Laws Governing Tax Harvesting in India 

To apply tax harvesting within the legal guideline, it’s important to know the present tax structure in India:

Section 112A: This section deals with long-term capital gains. If the long-term capital gains surpass Rs 1 lakh from the sale of equity-oriented mutual funds, units of a business trust or sales of listed equity shares, a 10% tax is implemented sans indexation benefits.

Section 111A: This section covers short-term capital gains. Profits from transferring equity-related instruments and equity shares are held for less fall or 12 months under this section. If the STT (Securities Transaction Tax) was paid during the transfer, these profits are taxed at the rate of 15% and it’s a flat rate. If STT is not paid, the profits are taxed as per the individual’s income tax slab rate.