Tax Harvesting: Do Not Wait for March 31 to Save Capital Gains Tax on Equities This Year

Tax harvesting is a strategy used to save taxes on long-term capital gains (LTCG) income, especially for individuals who earn income from the sale of equities. The method works by taking advantage of the LTCG exemption limit. This method can be used under both old and new tax regimes.

In other words, tax harvesting involves selling equities by March 31 within the tax exemption limit of Rs 1.25 lakh for the financial year 2024-25. Then, on April 1, 2025, buy back the same equity. This strategy helps you save taxes while still holding the same stocks.

Tax Harvesting Method makes more sense for the Financial Year 2024-25 for Two Key Reasons

• If your Long-Term Capital Gains (LTCG) income is within a certain limit, using the tax harvesting strategy will help you pay lower taxes compared to the previous financial year (FY 2023-24).
• On July 23, 2024, the LTCG tax-free exemption limit increased from Rs 1 lakh to Rs 1.25 lakh.

Use Tax Harvesting Method to save LTCG from Equities on or before March 28, 2025, for FY 2024-25

There is a holiday for the stock market on March 31, 2025. Therefore, in order to save tax, you need to use the tax harvesting method before March 28, 2025. The date of transaction plays an important role in taxation purposes.

How does Tax Harvesting help to Save more Income Tax as compared to FY 2023-24?

To understand this, it is important to first understand Section 112A in FY 2023-24. In FY 2023-24, Section 112A offered a Rs.1 lakh tax exemption on long-term capital gains (LTCG) from equities, including listed equity shares and equity-orientated mutual funds. As per an expert, any LTCG from the sale of listed equity shares exceeding Rs.1 lakh in that financial year was subject to a 10% tax without indexation benefits.

This section was revised in the Union Budget 2024, which was presented in July. The exemption limit for LTCG on equities was raised from Rs.1 lakh to Rs.1.25 lakh. Additionally, the income tax rate for LTCG was also increased to 12.5% from 10%. If you have any LTCG income exceeding Rs.1.25 lakh, then that extra income will be taxed at a rate of 12.5%.

LTCG Taxation for FY 2024-25

For FY 2024-25, there are two sets of rules for LTCG on equities:

• For LTCG income earned before July 23, 2024: The LTCG exemption limit remains at Rs.1 lakh, and any gains above this amount will be taxed at 10% (before surcharge and cess).
• For LTCG income earned on or after July 23, 2024: The LTCG exemption limit increases to Rs.1.25 lakh, offering a higher tax-free threshold (excluding surcharge and cess).

The increased tax exemption limit will benefit the taxpayers by saving more on long-term capital gains. The amount you can save depends on how much profit you make, as it’s affected by the updated tax rates.

Experts say that the LTCG tax exemption is applicable only to listed equities but the tax rate applies to all equity shares, including unlisted shares. After the Budget 2024 changes, the LTCG tax rate has been set at 12.5% for all equity shares, whether they are listed or unlisted. However, the tax exemption of Rs.1.25 lakh is only available for listed equity shares.