It is that time of the year when investors try to play smart over saving tax on Capital Gains through tax loss harvesting. Without going into all the nuances, the idea is, to offset the Long Term and Short Term capital gains for the financial year by booking losses on other equities. Investors then follow different strategies to buy back the equities post-settlement, or re-invest in other assets. While this is perfectly legal under Indian Tax Laws, the question to ask is, is it a no-brainer as it seems? While on the surface it might appear an obvious strategy, I tried to drill up a few scenarios where it may not be all that worthwhile to fiddle around with your portfolio to bring down your immediate tax liabilities.
Argument 1: You plan to sell off again in the next few months
Say, you have a current loss of INR 100 from an INR 1000 initial investment. So you book losses at INR 900 and repurchase at the same level of INR 900. In a few months, your investment reaches INR 1500, and you plan to book profits. That makes it INR 600 of STCG.
Tax saved = 15% of INR 100 = INR 15 (A)
Tax liability on next sell at INR 1500 = 15% of (1500 – 900) = INR 90 (B)
So effective tax liability due to Tax Loss Harvesting, Repurchase, and Selling again = (B) – (A) = INR 75
But if you had just held on to that equity and sold it one-time, and say this timeframe would have come under LTCG (i.e. > 1-year holding),
Tax liability would have been 10% of (1500 – 1000) = INR 50
So just instinctive sell-off for short-term tax burden reduction was a bad choice! On top of that, you paid double the transaction charges.
Argument 2: When you have a greater tax liability that exceeds the 1NR 100,000 limit per year constantly, you aren’t gaining anything effectively in the long run.
Say, in Year X, you have certain capital gains exceeding INR 100,000 per year. And in Year X+1, you similarly had made profits of greater than INR 100,000 per year. It doesn’t matter which year you offset your losses. So a financial year end is not the one and last opportunity to offset your Gain taxes.
Argument 3: In a bullish market, you could be losing out with positive momentum
Even though this is a point-of-time trading decision, when the market is bullish in the short term, any sell-off could turn out to be a bad speculative call and you might end up waiting for a price correction, and miss out on the immediate rally once you have sold your positions. These could very well apply to high beta stocks whose prices fluctuate rapidly in volatile markets.
With these said, one might consider pivoting their decision not solely in isolation on tax offset advantage, but in conjunction with the following –
Dead Equities
Equities that have been underperforming for a long time, and you see no hope in immediate upturn. These might be good candidates to put their misery to some use!
Stop Losses and Exits
I talked about Stock exit strategies in a previous post here. If you are hitting one of those exit strategy conditions, and your equity is at a loss, it would be worthwhile to pick them and book losses.
Portfolio rebalancing
This is the most convincing reason I can think of. You have plans to rebalance your portfolio, such as buying other stocks from the same sector, or even wanting to do sector rotation. What better time than it would be to book losses and offset them against any gains?
Tax Loss Harvesting does make sense to utilize, but just wearing a single lens and blindly doing a sell-off on every financial year-end may not play out in your favor always. I would refrain from being instinctive and zooming out a bit to see the longer picture.
Onto another financial year, and stay invested!
