Zerodha Co-Founder and CEO Nithin Kamath advised investors to consider tax-loss harvesting to reduce tax liability on investments and get better portfolio returns in the long run.

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In a series of tweets, Kamath told investors that successful investing is mostly concerned with “doing boring things well.” One such measure was tax-loss harvesting, which was also “a nice way to get rid of duds in your portfolio," Kamath said.

What is tax-loss harvesting?

Tax-loss harvesting happens when an investor sells some stock holdings at a loss to offset the capital gains he or she has realised by selling assets at a profit. The act of tax-loss harvesting effectively reduces the tax bill as the investor pays taxes only on the net profit, which is the amount gained minus the amount lost in sales. Although the strategy does not help in nullifying the losses, it can reduce the tax burden significantly.

At present, the government levies a 15 percent tax on short-term capital gains on stocks sold before one year of investments.

Also read: From IPO tsars to market pariahs: These companies lost Rs 2.28 lakh crore in M-cap

How does tax-loss harvesting work?

If an investor has made a short-term capital gain of Rs 1 lakh this year, he will have to pay taxes of Rs 15,000. If the same investor holds stocks with unrealised loss of Rs 60,000 and sells them, the short-term capital gain net would come down to Rs 40,000. As a result, the investor would have to pay taxes of Rs 6,000 only, which is 15 percent of Rs 40,000. The whole exercise would help the investor harvest losses and save taxes of Rs 9,000.

How it helps to better portfolio returns?

Investors can fund purchases of similar investments using the proceeds made from selling their floundering assets. This will grow over time and recoup the losses.

Also read: Best ways to save taxes: Investments and insurance

Points to remember

To enjoy the benefits of tax-loss harvesting, sales transactions have to be completed before the end of the financial year or March 31.

Most investors resort to tax-loss harvesting strategy at the end of the financial year. However, it can be practised in a planned manner throughout the year.

Also, it is important to keep in mind that the investor can offset long-term capital losses against long-term capital gains only. Long-term capital losses cannot be set off against short-term capital gains.

However, an investor can set off short-term capital losses against short-term capital gains or long-term capital gains.

Also read: Personal finance checklist: 6 things to do before March 31

(Edited by : Shoma Bhattacharjee)