Investment adviser’s basic goal is maximizing the after-tax wealth. In most economies around the world, taxes have a significant impact on net performance. Despite all this every investment opportunity the performance is published and grounded in a pretax framework.
What is Tax Loss Harvesting?
Tax-loss harvesting is the practice of selling investments or assets that have declined in value in order to create capital losses. It essentially uses investment losses in any one position to offset investment gains in another. This leads to overall savings because you’re reducing the taxable principal by the amount of that loss.
3 Guiding Tax Principles to start with
- The less you trade, the more tax efficient your portfolio will be
- The longer you defer paying taxes the faster your portfolio will compound
- Relative tax rates matter
For example, consider that an investment in Mutual Fund Company A that aims to tracks large Indian company stocks has gone down. The investor may sell his or her interest in Mutual Fund Company A and purchase an investment from Mutual Fund Company B, which invests in a different manner or different asset class. The investor may book a tax loss from the disposition of Mutual Fund Company A but maintain considerably similar exposure from its investment in Mutual Fund Company B.
When someone invest in equity oriented mutual funds you either make capital gains or capital losses. The duration of units which you hold defines whether short term or long term. Currently Long term Capital Gains (LTCG) above 1 lakh is taxed at 10% without indexation and short term capital gains at 15%.
India gives relaxation to investors to set off capital losses against the capital gain. For example, in any financial year if you made capital gain of Rs 80,000 and capital loss of Rs 30,000 then you have to pay tax on net gain of Rs 50,000 (Rs80,000 – Rs 30,000) only.
Similar effect is seen on products which are taxed annually (Fixed Deposits) VS. where the tax can be deferred until they are sold (Debt Mutual Fund)
We at FinvestR Capital use our own strategies and product mix to achieve this goal and maintan low taxable gains.