Tax Harvesting:
Tax harvesting is a strategic approach employed by investors to reduce their tax liabilities by selling investments that have experienced losses. The concept revolves around the idea of offsetting gains with losses, thereby decreasing taxable income. By selling investments at a loss, investors can realize capital losses that can be used to offset capital gains from other investments or sources.
The process of tax harvesting involves strategically selling investments that have depreciated in value, typically referred to as “harvesting” losses. These losses can then be used to offset any capital gains realized by the investor during the same tax year. By doing so, investors can effectively reduce their overall taxable income and, consequently, lower their tax liability.
One of the key advantages of tax harvesting is its ability to provide investors with a tax-efficient means of managing their investment portfolios. By strategically selling investments that have incurred losses, investors can mitigate their tax burden while maintaining their overall investment strategy. Additionally, tax harvesting allows investors to maintain a diversified portfolio while still taking advantage of tax-saving opportunities.
Carry Forward Losses:
Carry forward losses refer to the ability of investors to utilize unused losses from previous tax years to offset future gains. In situations where an investor incurs losses but does not have sufficient gains to offset them in the current tax year, these losses can be carried forward to subsequent years.
The concept of carry forward losses is particularly valuable for investors who may experience fluctuations in their investment returns over time. By carrying forward losses from previous years, investors can effectively reduce their taxable income in future years when they realize gains.
For example, suppose an investor incurs a loss of ₹1 lakh in the stock market in a given tax year but does not have any gains to offset it. In that case, they can carry forward this loss to future years and use it to offset any capital gains realized during those years.
It’s essential to note that the ability to carry forward losses is subject to certain limitations and conditions outlined in the Income Tax Act. These include restrictions on the types of losses that can be carried forward, the duration for which they can be carried forward, and the specific rules governing their utilization.
