Yes, the strategy mentioned in the video is commonly known as “Tax Harvesting” and is used to minimize Long-Term Capital Gains (LTCG) tax on stock market profits in India. However, there are a few important considerations and limitations you should be aware of.
How Does the Tax Harvesting Strategy Work?
- LTCG Tax Rules in India:
- Gains above ₹1,00,000 per financial year from equity shares and equity mutual funds attract 10% LTCG tax (without indexation).
- The first ₹1,00,000 is exempted from LTCG tax.
- What This Strategy Suggests:
- Instead of holding stocks for 10 years and paying 12.5% tax (or 10% for taxable amounts over ₹1 lakh), you sell your stocks every year once you complete 1 year of holding.
- By selling every year and booking profits within the ₹1 lakh exemption, you avoid paying any LTCG tax.
- Immediately buy back the same stocks, ensuring you continue to stay invested.
Does This Really Work?
✅ Yes, it works, but with conditions:
- You must ensure LTCG per year remains under ₹1,00,000 to fully utilize the tax exemption.
- The buy-back price may be slightly different, affecting the exact returns.
- You need to keep track of your sell & repurchase transactions every financial year.
⚠️ Things to Consider:
- STT & Brokerage Fees:
- While selling and repurchasing, you may have to pay brokerage fees & Securities Transaction Tax (STT), which can reduce your net benefit.
- Stock Price Volatility:
- When you sell, stock prices may fluctuate, and you may have to buy back at a slightly higher price, affecting long-term gains.
- Wash Sale Rule (Not in India, but applicable in some countries):
- The Indian tax laws currently do not have a “wash sale rule”, which means this strategy is legally allowed.
- However, if future tax laws change, this could become non-applicable.
- Liquidity Constraints:
- If you rely on this strategy, you must ensure you have liquidity to repurchase shares immediately.
Alternative Way to Reduce LTCG Tax
If you are investing with family members, you can gift stocks to family members who fall in a lower tax bracket:
- Parents (senior citizens have tax benefits).
- Spouse (if they are not working).
- Children (if they have no taxable income).
This way, the gains can be split across multiple accounts, reducing the overall taxable amount.
Final Verdict
✅ The tax harvesting strategy works and is legally valid in India.
⚠️ However, it requires careful execution, tracking, and awareness of brokerage costs and market conditions.
Would you like a step-by-step guide to implementing tax harvesting effectively? 🚀